Sega

The Diamond 3 Star was a coin-operated slot machine produced by Sega in the 1950s.

In 1940, American businessmen Martin Bromley, Irving Bromberg, and James Humpert formed Standard Games in Honolulu, Hawaii. Their aim was to provide coin-operated amusement machines, including slot machines, to military bases as the increase in personnel with the onset of World War II would create demand for entertainment. After the war, the founders sold Standard Games in 1945, and in 1946 established Service Games, named for the military focus.[1] After the United States government outlawed slot machines in its territories in 1952, Bromley sent employees Richard Stewart and Ray LeMaire to Tokyo to establish Service Games of Japan to provide coin-operated slot machines to U.S. bases in Japan.[2][3][4] A year later, all five men established Service Games Panama to control the entities of Service Games worldwide. The company expanded over the next seven years to include distribution in South Korea, the Philippines, and South Vietnam.[5] The name Sega, an abbreviation of Service Games,[6] was first used in 1954 on a slot machine, the Diamond Star.[5]

Due to notoriety arising from investigations by the US government into criminal business practices, Service Games of Japan was dissolved on May 31, 1960.[5] On June 3,[7] Bromley established two companies to take over its business activities, Nihon Goraku Bussan and Nihon Kikai Seizō.[lower-alpha 3] The two new companies purchased all of Service Games of Japan's assets. Kikai Seizō, doing business as Sega, Inc., focused on manufacturing slot machines. Goraku Bussan, doing business under Stewart as Utamatic, Inc., served as a distributor and operator of coin-operated machines, particularly jukeboxes.[5][8][9] The companies merged in 1964, retaining the Nihon Goraku Bussan name.[5]

During the same time frame, David Rosen, an American officer in the United States Air Force stationed in Japan, launched a photo booth business in Tokyo in 1954.[2] This company became Rosen Enterprises, and in 1957 began importing coin-operated games into Japan. In 1965, Nihon Goraku Bussan acquired Rosen Enterprises to form Sega Enterprises, Ltd.[lower-alpha 4] Rosen was installed as the CEO and managing director, while Stewart was named president and LeMaire was the director of planning. Shortly afterward, Sega stopped leasing to military bases and moved its focus from slot machines to coin-operated amusement machines.[10] Its imports included Rock-Ola jukeboxes, pinball games by Williams, and gun games by Midway Manufacturing.[11]

Former logo

Because Sega imported second-hand machines, which required frequent maintenance, it began constructing replacement guns and flippers for its imported games. According to former Sega director Akira Nagai, this led to the company developing its own games.[11] The first electromechanical game Sega manufactured was the submarine simulator Periscope, released worldwide in the late 1960s. It featured light and sound effects considered innovative, and was successful in Japan. It was exported to malls and department stores in Europe and the United States, and helped standardize the 25-cent-per-play cost for arcade games in the U.S. Sega was surprised by the success, and for the next two years, the company produced and exported between eight and ten games per year.[12] Despite this, rampant piracy led Sega to cease exporting its games around 1970.[13]

In 1969, Sega was sold to the American conglomerate Gulf and Western Industries, although Rosen remained CEO. In 1974, Gulf and Western made Sega Enterprises, Ltd., a subsidiary of an American company renamed Sega Enterprises, Inc. Sega released Pong-Tron, its first video-based game, in 1973.[13] Despite late competition from Taito's hit arcade game Space Invaders in 1978,[11] Sega prospered from the arcade game boom of the late 1970s, with revenues climbing to over US$100 million by 1979. During this period, Sega acquired Gremlin Industries, which manufactured microprocessor-based arcade games,[14] and Esco Boueki, a coin-op distributor founded and owned by Hayao Nakayama. Nakayama was placed in a management role of Sega's Japanese operations.[15] In the early 1980s, Sega was one of the top five arcade game manufacturers active in the United States, as company revenues rose to $214 million.[16] 1979 saw the release of Head On, which introduced the "eat-the-dots" gameplay Namco later used in Pac-Man.[17] In 1981, Sega licensed Frogger, its most successful game until then.[18] In 1982, Sega introduced the first game with isometric graphics, Zaxxon.[19]

Sega's first video game console, the SG-1000

Following a downturn in the arcade business starting in 1982, Gulf and Western sold its North American arcade game manufacturing organization and the licensing rights for its arcade games to Bally Manufacturing in September 1983.[20][21][22] Gulf and Western retained Sega's North American R&D operation and its Japanese subsidiary, Sega Enterprises, Ltd. With its arcade business in decline, Sega Enterprises, Ltd. president Nakayama advocated for the company to use its hardware expertise to move into the home consumer market in Japan.[23] This led to Sega's development of a computer, the SC-3000. Learning that Nintendo was developing a games-only console, the Famicom, Sega developed its first home video game system, the SG-1000, alongside the SC-3000.[24] Rebranded versions of the SG-1000 were released in several other markets worldwide.[24][25][26][27] The SG-1000 sold 160,000 units in 1983, which far exceeded Sega's projection of 50,000 in the first year,[24] but was outpaced by the Famicom. This was in part because Nintendo expanded its game library by courting third-party developers, whereas Sega was hesitant to collaborate with companies with which it was competing in the arcades.[24]

In November 1983, Rosen announced his intention to step down as president of Sega Enterprises, Inc. on January 1, 1984. Jeffrey Rochlis was announced as the new president and COO of Sega.[28] Shortly after the launch of the SG-1000, and the death of company founder Charles Bluhdorn, Gulf and Western began to sell off its secondary businesses.[29] Nakayama and Rosen arranged a management buyout of the Japanese subsidiary in 1984 with financial backing from CSK Corporation, a prominent Japanese software company.[30] Sega's Japanese assets were purchased for $38 million by a group of investors led by Rosen and Nakayama. Isao Okawa, head of CSK, became chairman,[15] while Nakayama was installed as CEO of Sega Enterprises, Ltd.[31]

The Master System, released in North America in 1986 and Europe in 1987

In 1985, Sega began working on the Mark III,[32] a redesigned SG-1000.[33] For North America, Sega rebranded the Mark III as the Master System,[34] with a futuristic design intended to appeal to Western tastes.[35] The Mark III was released in Japan in October 1985.[36] Despite featuring more powerful hardware than the Famicom in some ways, it was unsuccessful at launch. As Nintendo required third-party developers not to publish their Famicom games on other consoles, Sega developed its own games and obtained the rights to port games from other developers.[32] To help market the console in North America, Sega planned to sell the Master System as a toy, similar to how Nintendo had done with the Nintendo Entertainment System. Sega partnered with Tonka, an American toy company, to make use of Tonka's expertise in the toy industry.[37] Ineffective marketing by Tonka handicapped sales of the Master System.[38] By early 1992, production had ceased in North America. The Master System sold between 1.5 million and 2 million units in the region.[39] This was less market share in North America than both Nintendo and Atari, which controlled 80 percent and 12 percent of the market respectively.[40] The Master System was eventually a success in Europe, where it outsold the NES by a considerable margin.[41] As late as 1993, the Master System's active installed user base in Europe was 6.25 million units.[41] The Master System has had continued success in Brazil. New versions continue to be released by Sega's partner in the region, Tectoy.[42] By 2016, the Master System had sold 8 million units in Brazil.[43]

During 1984, Sega opened its European division of arcade distribution, Sega Europe.[44] It re-entered the North American arcade market in 1985 with the establishment of Sega Enterprises USA at the end of a deal with Bally. The release of Hang-On in 1985 would prove successful in the region, becoming so popular that Sega struggled to keep up with demand for the game.[45] UFO Catcher was introduced in 1985 and as of 2005 was Japan's most commonly installed claw crane game.[46] In 1986, Sega of America was established to manage the company's consumer products in North America, beginning with marketing the Master System.[47] During Sega's partnership with Tonka, Sega of America relinquished marketing and distribution of the console and focused on customer support and some localization of games.[37] Out Run, released in 1986, became Sega's best selling arcade cabinet of the 1980s.[48] Former Sega director Akira Nagai said Hang-On and Out Run helped to pull the arcade game market out of the 1982 downturn and created new genres of video games.[11]

The Sega Genesis (second North American version pictured) took control of the 16-bit console market.

With the arcade game market once again growing, Sega was one of the most recognized game brands at the end of the 1980s. In the arcades, the company focused on releasing games to appeal to diverse tastes, including racing games and side-scrollers.[49] Sega released the Master System's successor, the Mega Drive, in Japan on October 29, 1988. The launch was overshadowed by Nintendo's release of Super Mario Bros. 3 a week earlier. Positive coverage from magazines Famitsu and Beep! helped establish a following, but Sega shipped only 400,000 units in the first year.[50] The Mega Drive struggled to compete against the Famicom[51] and lagged behind Nintendo's Super Famicom and NEC's PC Engine in Japanese sales throughout the 16-bit era.[52] For the North American launch, where the console was renamed Genesis, Sega had no sales and marketing organization. After Atari declined an offer to market the console in the region, Sega launched it through its own Sega of America subsidiary. The Genesis was launched in New York City and Los Angeles on August 14, 1989, and in the rest of North America later that year.[53] The European version of the Mega Drive was released in September 1990.[54]

Former Atari executive and new Sega of America president Michael Katz developed a two-part strategy to build sales in North America. The first part involved a marketing campaign to challenge Nintendo and emphasize the more arcade-like experience available on the Genesis,[53][55] with slogans including "Genesis does what Nintendon't".[50] Since Nintendo owned the console rights to most arcade games of the time, the second part involved creating a library of games which used the names and likenesses of celebrities, such as Michael Jackson's Moonwalker and Joe Montana Football.[2][56] Nonetheless, Sega had difficulty overcoming Nintendo's ubiquity in homes.[57] Despite being tasked by Nakayama to sell a million units in the first year, Katz and Sega of America sold only 500,000.[50]

Sonic the Hedgehog has been Sega's mascot since 1991.[58]

After the launch of the Genesis, Sega sought a new flagship series to compete with Nintendo's Mario series.[59] Its new character, Sonic the Hedgehog, went on to feature in one of the best-selling video game franchises in history.[60][61] Sonic the Hedgehog began with a tech demo created by Yuji Naka involving a fast-moving character rolling in a ball through a winding tube; this was fleshed out with Naoto Ohshima's character design and levels conceived by designer Hirokazu Yasuhara.[62] Sonic's color was chosen to match Sega's cobalt blue logo; his shoes were inspired by Michael Jackson's boots, and his personality by Bill Clinton's "can-do" attitude.[63][64][65]

Nakayama hired Tom Kalinske as CEO of Sega of America in mid-1990, and Katz departed soon after. Kalinske knew little about the video game market, but surrounded himself with industry-savvy advisors. A believer in the razor-and-blades business model, he developed a four-point plan: cut the price of the Genesis, create a U.S. team to develop games targeted at the American market, expand the aggressive advertising campaigns, and replace the bundled game Altered Beast with Sonic the Hedgehog. The Japanese board of directors disapproved,[57] but it was approved by Nakayama, who told Kalinske, "I hired you to make the decisions for Europe and the Americas, so go ahead and do it."[50] In large part due to the popularity of Sonic the Hedgehog,[57] the Genesis outsold its main competitor, the Super Nintendo Entertainment System (SNES), in the United States nearly two to one during the 1991 holiday season. By January 1992, Sega controlled 65 percent of the 16-bit console market.[66] Sega outsold Nintendo for four consecutive Christmas seasons[67] due to the Genesis' head start, lower price, and a larger library compared to the SNES at release.[68] Nintendo's dollar share of the U.S. 16-bit market dropped from 60% at the end of 1992 to 37% at the end of 1993,[69] Sega claimed 55% of all 16-bit hardware sales during 1994,[70] and the SNES outsold the Genesis from 1995 through 1997.[71][72][73]

In 1990, Sega launched the Game Gear, a handheld console, to compete against Nintendo's Game Boy. The Game Gear was designed as a portable version of the Master System and featured a full-color screen, in contrast to the monochrome Game Boy screen.[74] Due to its short battery life, lack of original games, and weak support from Sega, the Game Gear did not surpass the Game Boy, having sold approximately 11 million units.[75] Sega launched the Mega-CD in Japan on December 1, 1991, initially retailing at JP¥49,800.[76] The add-on uses CD-ROM technology. Further features include a second, faster processor, vastly expanded system memory, a graphics chip that performed scaling and rotation similar to Sega's arcade games, and another sound chip.[77][78] In North America, it was renamed the Sega CD and launched on October 15, 1992, with a retail price of US$299.[77] It was released in Europe as the Mega-CD in 1993.[76] The Mega-CD sold only 100,000 units during its first year in Japan, falling well below expectations.[76] Sega did have success with arcade games; in 1992 and 1993, the new Sega Model 1 arcade system board showcased in-house development studio Sega AM2's Virtua Racing and Virtua Fighter (the first 3D fighting game), which played a crucial role in popularizing 3D polygonal graphics.[79][80][81][82]

In 1993, the American media began to focus on the mature content of certain video games, such as Night Trap for the Sega CD and the Genesis version of Midway's Mortal Kombat.[83][84] This came at a time when Sega was capitalizing on its image as an "edgy" company with "attitude", and this reinforced that image.[51] To handle this, Sega instituted the United States' first video game ratings system, the Videogame Rating Council (VRC), for all its systems. Ratings ranged from the family-friendly GA rating to the more mature rating of MA-13, and the adults-only rating of MA-17.[84] Executive vice president of Nintendo of America Howard Lincoln was quick to point out in the United States congressional hearings in 1993 that Night Trap was not rated at all. Senator Joe Lieberman called for another hearing in February 1994 to check progress toward a rating system for video game violence.[84] After the hearings, Sega proposed the universal adoption of the VRC; after objections by Nintendo and others, Sega took a role in forming the Entertainment Software Rating Board.[84]

Sega began work on the Genesis' successor, the Sega Saturn, over two years before the system was showcased at the Tokyo Toy Show in June 1994.[85] According to former Sega of America producer Scot Bayless, Nakayama became concerned about the 1994 release of the Atari Jaguar, and that the Saturn would not be available until the next year. As a result, Nakayama decided to have a second console release to market by the end of 1994. Sega began to develop the 32X, a Genesis add-on which would serve as a less expensive entry into the 32-bit era.[86] The 32X would not be compatible with the Saturn, but would play Genesis games.[31] Sega released the 32X on November 21, 1994, in North America, December 3, 1994, in Japan, and January 1995 in PAL territories, and was sold at less than half of the Saturn's launch price.[87][88] After the holiday season, interest in the 32X rapidly declined.[86][89]

The Sega Saturn was not as successful as its predecessor, the Genesis.

Sega released the Saturn in Japan on November 22, 1994.[90] Virtua Fighter, a port of the popular arcade game, sold at a nearly one-to-one ratio with the Saturn at launch and was crucial to the system's early success in Japan.[91][92][93] Sega's initial shipment of 200,000 Saturn units sold out on the first day,[2][93][94] and it was more popular than new competitor Sony's PlayStation in Japan.[93][95] In March 1995, Sega of America CEO Tom Kalinske announced that the Saturn would be released in the U.S. on "Saturnday" (Saturday) September 2, 1995.[96][97] Sega of Japan mandated an early launch to give the Saturn an advantage over the PlayStation.[94] At the first Electronic Entertainment Expo (E3) in Los Angeles on May 11, 1995, Kalinske revealed the release price and that Sega had shipped 30,000 Saturns to Toys "R" Us, Babbage's, Electronics Boutique, and Software Etc. for immediate release.[96] The Saturn's release in Europe also came before the previously announced North American date, on July 8, 1995.[98] Within two days of the PlayStation's American launch on September 9, 1995, the PlayStation sold more units than the Saturn had in the five months following its surprise launch.[99][100] Within its first year, the PlayStation secured over twenty percent of the U.S. video game market.[101] The console's high price point, surprise launch causing issues with distributors and third-party developers, and difficulty handling polygonal graphics were factors in its lack of success.[102] Sega also underestimated the continued popularity of the Genesis; sales of 16-bit games and consoles accounted for 64 percent of the market in 1995.[103][104] Despite capturing 43 percent of the dollar share of the U.S. market and selling more than 2 million Genesis units in 1995, Kalinske estimated that Sega could have sold another 300,000 consoles if it had been prepared for demand.[105]

Sega announced that Shoichiro Irimajiri had been appointed chairman and CEO of Sega of America in July 1996, while Kalinske left Sega after September 30 of that year.[106][107] A former Honda executive,[108][109] Irimajiri had been involved with Sega of America since joining Sega in 1993.[106][110] The company also announced that Rosen and Nakayama had resigned from their positions at Sega of America, though both remained with Sega.[106][111] Bernie Stolar, a former executive at Sony Computer Entertainment of America,[112][113] became Sega of America's executive vice president in charge of product development and third-party relations.[106][107] Stolar was not supportive of the Saturn, believing its hardware was poorly designed.[2] While Stolar had said "the Saturn is not our future" at E3 1997, he continued to emphasize the quality of its games,[2] and later reflected that "we tried to wind it down as cleanly as we could for the consumer."[113] At Sony, Stolar had opposed the localization of certain Japanese PlayStation games that he felt would not represent the system well in North America. He advocated a similar policy for the Saturn, although he later sought to distance himself from this stance.[2][114][115] Other changes included a softer image in Sega's advertising, including removing the "Sega!" scream, and holding press events for the education industry.[116]

Sega partnered with GE to develop the Model 2 arcade system board, building onto 3D technology in the arcade industry at the time. This led to several successful arcade games, including Daytona USA, launched in a limited capacity in late 1993 and worldwide in 1994. Other popular games included Virtua Cop and Virtua Fighter 2.[117] Aside from the Saturn, Sega made forays in the PC market with the 1995 establishment of SegaSoft, which was tasked with creating original Saturn and PC games.[118][119] In 1996, Sega operated in-door theme parks not only in Japan with Joypolis, but also overseas, with Sega World branded arcades in the UK and Australia.[120][121] From 1994 to 1999, Sega participated in the pinball market when it took over Data East's pinball division.[122]

In January 1997, Sega announced its intentions to merge with the Japanese toymaker Bandai. The merger, planned as a $1 billion stock swap whereby Sega would wholly acquire Bandai, was set to form a company known as Sega Bandai, Ltd.[123][124] Though it was to be finalized in October of that year, it was called off in May after growing opposition from Bandai's midlevel executives. Bandai instead agreed to a business alliance with Sega.[125] As a result of Sega's deteriorating financial situation, Nakayama resigned as Sega president in January 1998 in favor of Irimajiri.[108] Nakayama's resignation may have in part been due to the failure of the merger, as well as Sega's 1997 performance.[126] Stolar became CEO and president of Sega of America.[113][127]

The Saturn failed to take the lead in the market. After the launch of the Nintendo 64 in 1996, sales of the Saturn and its games fell sharply,[113] while the PlayStation outsold the Saturn three-to-one in the U.S. in 1997.[101] Following five years of declining profits,[128] in the fiscal year ending March 31, 1998, Sega suffered its first financial losses since its 1988 listing on the Tokyo Stock Exchange as both a parent company and a corporation as a whole.[129] Shortly before the announcement of the losses, Sega discontinued the Saturn in North America to prepare for the launch of its successor, the Dreamcast.[108][113] The decision effectively left the Western market without Sega games for over a year.[130] The Saturn lasted longer in Japan and Europe,[109] Irimajiri telling Japanese newspaper Daily Yomiuri that Saturn development would stop at the end of 1998 and games would continue to be produced until mid-1999.[131] Sega suffered a further ¥42.881 billion consolidated net loss in the fiscal year ending March 1999, and announced plans to eliminate 1,000 jobs, nearly a quarter of its workforce.[132][133] With lifetime sales of 9.26 million units,[134] the Saturn is considered a commercial failure.[135] Sega's arcade divisions also struggled in the late 1990s, partly due to a market slump following competition from home consoles.[136]

The Dreamcast, discontinued in 2002, was Sega's last video game console.

Despite a 75 percent drop in half-year profits just before the Japanese launch of the Dreamcast, Sega felt confident about its new system. The Dreamcast attracted significant interest and drew many pre-orders.[137] Sega announced that Sonic Adventure, the next game starring company mascot Sonic the Hedgehog, would be a Dreamcast launch game. It was promoted with a large-scale public demonstration at the Tokyo Kokusai Forum Hall.[138][139][140] Due to a high failure rate in the manufacturing process, Sega could not ship enough consoles for the Dreamcast's Japanese launch.[137][141] As more than half of its limited stock had been pre-ordered, Sega stopped pre-orders in Japan.[142] Before the launch, Sega announced the release of its New Arcade Operation Machine Idea (NAOMI) arcade system board, which served as a cheaper alternative to the Sega Model 3.[143] NAOMI shared technology with the Dreamcast, allowing nearly identical ports of arcade games.[130][144]

The Dreamcast launched in Japan on November 27, 1998. The entire stock of 150,000 consoles sold out by the end of the day.[142] Irimajiri estimated that another 200,000 to 300,000 Dreamcast units could have been sold with sufficient supply.[142] He hoped to sell more than a million Dreamcast units in Japan by February 1999, but less than 900,000 were sold. The low sales undermined Sega's attempts to build up a sufficient installed base to ensure the Dreamcast's survival after the arrival of competition from other manufacturers.[145] Before the Western launch, Sega reduced the price of the Dreamcast in Japan by JP¥9,100, effectively making it unprofitable but increasing sales.[137]

On August 11, 1999, Sega of America confirmed that Stolar had been fired.[146] Peter Moore, whom Stolar had hired as a Sega of America executive only six months before,[147] was placed in charge of the North American launch.[146][148][149][150] The Dreamcast launched in North America on September 9, 1999,[130][145][151] with 18 games.[151][152][153] Sega set a 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".[147] Within two weeks, U.S. Dreamcast sales exceeded 500,000.[147] By Christmas, Sega held 31 percent of the U.S. video game market by revenue.[154] On November 4, Sega announced it had sold more than a million Dreamcast units.[155] Nevertheless, the launch was marred by a glitch at one of Sega's manufacturing plants, which produced defective GD-ROMs where data was not properly recorded onto the disc.[156] Sega released the Dreamcast in Europe on October 14, 1999.[155] While Sega sold 500,000 units in Europe by Christmas 1999,[137] sales there slowed, and by October 2000 Sega had sold only about a million units.[157]

Though the Dreamcast's launch was successful, Sony's PlayStation still held 60 percent of the overall market share in North America at the end of 1999.[155] On March 2, 1999, in what one report called a "highly publicized, vaporware-like announcement",[158] Sony revealed the first details of its "next-generation PlayStation".[159][160] The same year, Nintendo announced that its next console would meet or exceed anything on the market, and Microsoft began development of its own console, the Xbox.[161][162][163] Sega's initial momentum proved fleeting as U.S. Dreamcast sales—which exceeded 1.5 million by the end of 1999[164]—began to decline as early as January 2000.[165] Poor Japanese sales contributed to Sega's ¥42.88 billion ($404 million) consolidated net loss in the fiscal year ending March 2000. This followed a similar loss of ¥42.881 billion the previous year and marked Sega's third consecutive annual loss.[132][166] Sega's overall sales for the term increased 27.4 percent, and Dreamcast sales in North America and Europe greatly exceeded its expectations. However, 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.[132] At the same time, worsening conditions reduced the profitability of Sega's Japanese arcade business, prompting the closure of 246 locations.[132][167]

Moore said the Dreamcast would need to sell 5 million units in the U.S. by the end of 2000 to remain viable, but Sega fell short of this goal with some 3 million units sold.[154][168] Moreover, Sega's attempts to spur Dreamcast sales through lower prices and cash rebates caused escalating financial losses.[169] In March 2001, Sega posted a consolidated net loss of ¥51.7 billion ($417.5 million).[170] While the PlayStation 2's October 26 U.S. launch was marred by shortages, this did not benefit the Dreamcast as much as expected, as many disappointed consumers continued to wait or purchased a PSone.[154][171][172] Eventually, Sony and Nintendo held 50 and 35 percent of the U.S. video game market respectively, while Sega held only 15 percent.[137]

[128][132][173][174]

CSK chairman Isao Okawa replaced Irimajiri as president of Sega on May 22, 2000.[175] Okawa had long advocated that Sega abandon the console business.[176] Others shared this view; 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 the company to Microsoft.[2][177] In a September 2000 meeting with Sega's Japanese executives and heads of its first-party game studios, Moore and Sega of America executive Charles Bellfield recommended that Sega abandon its console business. In response, the studio heads walked out.[147] Sega announced an official company name change from Sega Enterprises, Ltd. to Sega Corporation effective November 1, 2000. Sega stated in a release that this was to display its commitment to its "network entertainment business".[178]

On January 23, 2001, Japanese newspaper Nihon Keizai Shinbun reported that Sega would cease production of the Dreamcast and develop software for other platforms.[179] After an initial denial, Sega of Japan released a press release confirming it was considering producing software for the PlayStation 2 and Game Boy Advance as part of its "new management policy".[180] 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.[181][182] Sega also announced a Dreamcast price reduction to eliminate its unsold inventory, estimated at 930,000 units as of April 2001.[183][184] This was followed by further reductions to clear the remaining inventory.[185][186] The final manufactured Dreamcast was autographed by the heads of all nine of Sega's first-party game studios, plus the heads of sports game developer Visual Concepts and audio studio Wave Master, and given away with 55 first-party Dreamcast games through a competition organized by GamePro.[187]

Okawa, who had 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 the company survive the third-party transition.[188][189][190] He held failed talks with Microsoft about a sale or merger with their Xbox division.[191] According to former Microsoft executive Joachim Kempin, Microsoft founder Bill Gates decided against acquiring Sega because "he didn't think that Sega had enough muscle to eventually stop Sony."[192] A business alliance with Microsoft was announced where Sega develops 11 games for the new Xbox console.[193] As part of the restructuring, nearly one third of Sega's Tokyo workforce was laid off in 2001.[194] 2002 was Sega's fifth consecutive fiscal year of net losses.[195] After Okawa's death, Hideki Sato, a 30-year Sega veteran who had worked on Sega's consoles, became company president. Following poor sales in 2002, Sega cut its profit forecast for 2003 by 90 percent, and explored opportunities for mergers. In 2003, Sega began talks with Sammy Corporation–a pachinko and pachislot manufacturing company–and video game company Namco. The president of Sammy, Hajime Satomi, had a history with Sega, as he was mentored by Isao Okawa and was previously asked to be CEO of Sega.[196] On February 13, Sega announced that it would merge with Sammy but, as late as April 17, Sega was still in talks with Namco, which was attempting to overturn the merger. Sega's consideration of Namco's offer upset Sammy executives. The day after Sega announced it was no longer planning to merge with Sammy, Namco withdrew its offer.[197] In 2003, Sato and COO Tetsu Kamaya stepped down, Sato being replaced by Hisao Oguchi, the head of the Sega studio Hitmaker.[198] Peter Moore left Sega of America in January 2003. The reason for leaving was a frustrating meeting with Sega of Japan refusing to adapt to the changing gaming landscape due to mature games like Grand Theft Auto III.[199] Hideaki Irie became the new President and COO of Sega of America in October 2003. Irie previously worked at Agetec and ASCII.[200]

Sega Sammy Holdings (current logo pictured) was founded in 2004 with pachinko and pachislot manufacturer Sammy Corporation's purchase of Sega.

In August 2003, Sammy bought 22.4 percent of Sega's shares from CSK, making Sammy into Sega's largest shareholder.[201][202] In the same year, Hajime Satomi said Sega's activity would focus on its profitable arcade business as opposed to loss-incurring home software development.[203] In 2004, Sega Sammy Holdings, an entertainment conglomerate, was created; Sega and Sammy became subsidiaries of the new holding company, both companies operating independently while the executive departments merged. According to the first Sega Sammy Annual Report, the merger went ahead as both companies were facing difficulties. Satomi said Sega had been operating at a loss for nearly ten years,[204] while Sammy feared stagnation and overreliance of its highly profitable pachislot and pachinko machine business and wanted to diversify.[46] Sammy acquired the remaining percentages of Sega, completing a takeover.[205] The stock swap deal valued Sega between $1.45 billion and $1.8 billion.[204][206] Sega Sammy Holdings was structured into four parts: Consumer Business (video games), Amusement Machine Business (arcade games), Amusement Center Business (Sega's theme parks and arcades) and Pachislot and Pachinko Business (Sammy's pachinko and pachislot business).[207]

After the decline of the global arcade industry around the 21st century, Sega introduced several novel concepts tailored to the Japanese market. Derby Owners Club was an arcade machine with memory cards for data storage, designed to take over half an hour to complete and costing JP¥500 to play. Testing of Derby Owners Club in an arcade in Chicago showed that it had become the most popular machine in the arcade, with a 92% replay rate. While the eight-player Japanese version of the game was released in 1999, the game was reduced to a smaller four-player version due to size issues and released in North America in 2003.[208] Sega introduced trading card game machines, with games such as World Club Champion Football for general audiences and Mushiking: The King of Beetles for young children. The company also introduced internet functionality in arcades with Virtua Fighter 4 in 2001, and further enhanced it with ALL.Net, a network system for arcade games, introduced in 2004.[209] In 2005, the GameWorks chain of arcades came under Sega ownership,[210] until it was sold in 2011[211] In 2009, Sega Republic, an indoor theme park, opened in Dubai.[212] Sega gradually reduced its arcade centers from 450 in 2005[213] to around 200 in 2015.[214] However arcade machine sales incurred higher profits than the company's console, mobile and PC games on a year-to-year basis until the fiscal year of 2014.[215]

In order to drive growth in western markets, Sega announced new leadership for Sega of America and Sega Europe in 2005. Simon Jeffery became president and COO of Sega of America, and Mike Hayes president and COO for Sega Europe.[216] In 2009, Mike Hayes became president of the combined outfit of Sega West which includes both Sega of America and Sega Europe, due to Simon Jeffery leaving.[217] Mike Hayes is credited for re-inventing Sega's software strategy taking it from failing to 500 Million in revenue, focusing on PC with franchises like Total War and Football Manager, selling Mario & Sonic at the Olympic games and at one point being one of the top 3 costumers on Steam.[218]

In the console and handheld business, Sega found success with games targeted at the Japanese market such as the Yakuza and Hatsune Miku: Project DIVA series. Related to Hatsune Miku, in 2010, Sega began providing the 3D imaging for her holographic concerts.[219] Sega also distributes games from smaller Japanese game developers and sells localizations of Western games in Japan.[220][221] In 2013, Index Corporation was purchased by Sega Sammy after going bankrupt.[222] After the buyout, Sega implemented a corporate spin-off with Index. The latter's game assets were rebranded as Atlus, a wholly owned subsidiary of Sega.[223]

In the mobile market, Sega released its first app on the iTunes Store with a version of Super Monkey Ball in 2008.[224] Due in part to the decline of packaged game sales worldwide in the 2010s,[225] Sega began layoffs and closed five offices based in Europe and Australia on July 1, 2012.[226] This was to focus on the digital game market, such as PC and mobile devices.[227][228] Strong performers for Sega on these platforms include Phantasy Star Online 2 and Chain Chronicle.In 2012, Sega also began acquiring studios for mobile development, studios such as Hardlight, Three Rings Design, and Demiurge Studios becoming fully owned subsidiaries.[229][230][231] 19 older mobile games were pulled due to quality concerns in May 2015.[232][233]

To streamline operations, Sega established operational firms for each of its businesses in the 2010s. In 2012, Sega established Sega Networks as a subsidiary company for its mobile games.[234] The same year, Sega Entertainment was established for Sega's amusement facility business.[235] In January 2015, Sega of America announced its relocation from San Francisco to Atlus USA's headquarters in Irvine, California, which was completed later that year.[236] From 2005 to 2015, Sega's operating income generally saw improvements compared to Sega's past financial problems, but was not profitable every year.[237]

In April 2015, Sega Corporation was reorganized into Sega Group, one of three groups of Sega Sammy Holdings. Sega Holdings Co., Ltd. was established, with four business sectors under its control. Haruki Satomi, son of Hajime Satomi, took office as president and CEO of the company in April 2015.[238][239] Sega Games Co., Ltd. became the legal name of Sega Corporation and continued to manage home video games, while Sega Interactive Co., Ltd. was founded to take control of the arcade division.[240][241] Sega Networks merged with Sega Games Co., Ltd. in 2015.[234] At the Tokyo Game Show in September 2016, Sega announced that it had acquired the intellectual property and development rights to all games developed and published by Technosoft.[242]

Sega's headquarters in Shinagawa-ku, Tokyo, Japan

Sega Sammy Holdings announced in April 2017 that it would relocate its head office functions and domestic subsidiaries located in the Tokyo metropolitan area to Shinagawa-ku by January 2018. This was to consolidate scattered head office functions including Sega Sammy Holdings, Sammy Corporation, Sega Holdings, Sega Games, Atlus, Sammy Network, and Dartslive.[243] Sega's previous headquarters in Ōta was sold in 2019 and will likely be torn down.[244]

In June 2017, Chris Bergstresser replaced Jurgen Post as president and COO of Sega Europe.[245] In June 2018, Gary Dale, formerly of Rockstar Games and Take-Two Interactive, replaced Chris Bergstresser as president and COO of Sega Europe.[246] A few months later, Ian Curran, a former executive at THQ and Acclaim Entertainment, replaced John Cheng as president and COO of Sega of America in August 2018.[247] In October 2018, Sega reported favorable western sales results from games such as Yakuza 6 and Persona 5, due to the localization work of Atlus USA.[248]

Despite a 35-percent increase in the sale of console games and success in its PC game business, profits fell 70 percent for the 2018 fiscal year in comparison to the previous year, mainly due to the digital games market which includes mobile games as well as Phantasy Star Online 2. In response, Sega announced that for its digital games it would focus on releases for its existing intellectual property and also focus on growth areas such as packaged games in the overseas market. Sega blamed the loss on market miscalculations and having too many games under development. Projects in development at Sega included a new game in the Yakuza series, the Sonic the Hedgehog film, and the Sega Genesis Mini,[249][250] which was released in September 2019.[251] In May 2019, Sega acquired Two Point Studios, known for Two Point Hospital.[252][253]

On April 1, 2020, Sega Interactive merged with Sega Games Co., Ltd. The company was again renamed Sega Corporation, while Sega Holdings Co., Ltd. was renamed Sega Group Corporation.[254] According to a company statement, the move was made to allow greater research and development flexibility.[255] In April 2020, Sega sold Demiurge Studios to Demiurge co-founder Albert Reed. Demiurge said it would continue to support the mobile games it developed under Sega.[256]

In June, as part of its 60th anniversary, Sega announced the Game Gear Micro microconsole, scheduled for October 6, 2020 in Japan.[257] Sega also announced its Fog Gaming platform, which will use the unused processing power of arcade machines in Japanese arcades overnight to help power cloud gaming applications.[257]

In the latter half of 2020, much of the financial gains Sega had in the earlier part of the year were wiped out due to the impact of the COVID-19 pandemic on its Sega Entertainment division which ran its arcades.[258] In September 2020, Sega closed its long-standing arcade in Akihabara, and in November, Sega Sammy sold most of its ownership in the division to Genda Inc, planning to be completely out of the arcade operation business by the end of 2020 though will continue to produce arcade games.[259]

Club Sega game center in Akihabara, Tokyo

After the formation of Sega Group in 2015 and the founding of Sega Holdings (now Sega Group Corporation), the former Sega Corporation was renamed Sega Games Co., Ltd.[241] Under this structure, Sega Games was responsible for the home video game market and consumer development, while Sega Interactive Co., Ltd., comprised Sega's arcade game business.[240] The two were consolidated in 2020, renamed as Sega Corporation.[255] The company includes Sega Networks, which handles game development for smartphones.[238] Sega Corporation develops and publishes games for major video game consoles and arcade cabinets, and has not expressed interest in developing consoles again. According to former Sega Europe CEO Mike Brogan, "There is no future in selling hardware. In any market, through competition, the hardware eventually becomes a commodity ... If a company has to sell hardware then it should only be to leverage software, even if that means taking a hit on the hardware."[51]

Sega Toys Co., Ltd. has created toys for children's franchises such as Oshare Majo: Love and Berry, Mushiking: King of the Beetles, Lilpri, Bakugan, Jewelpet, Rilu Rilu Fairilu, Dinosaur King and Hero Bank. Products released in the West include the home planetarium Homestar and the robot dog iDog. The Homestar was released in 2005 and has been improved several times. Its newest model, Flux, was released in 2019. The series is developed by the Japanese inventor and entrepreneur Takayuki Ohira. As a recognized specialist for professional planetariums, he has received numerous innovation prizes and supplies large planetariums internationally with his company Megastar. Sega Toys also inherited the Sega Pico handheld system and produced Pico software.[266] Sega has operations of bowling alleys and arcades through its Sega Entertainment Co., Ltd. subsidiary.[240] Since its first arcade opened in Japan in 1970, Sega has maintained a presence in operating arcades there, but has not been consistently successful in other territories.[267] Its DartsLive subsidiary creates electronic darts games,[262] while Sega Logistics Service distributes and repairs arcade games.[240] In 2015, Sega and Japanese advertising agency Hakuhodo formed a joint venture, Stories LLC, to create entertainment for film and TV. Stories LLC has exclusive licensing rights to adapt Sega properties into film and television,[268][269] and has partnered with producers to develop series based on properties including Shinobi, Golden Axe, Virtua Fighter, The House of the Dead, and Crazy Taxi.[270]

As a games publisher, Sega produces games through its research and development teams. The Sonic the Hedgehog franchise, maintained through Sega's Sonic Team division, is one of the best-selling franchises in the history of video games.[271] Sega has also acquired third-party studios that are now owned by the company, including Amplitude Studios,[272] Atlus,[223] Creative Assembly,[273] Hardlight,[231] Relic Entertainment,[274] Sports Interactive,[275] and Two Point Studios.[252][253]

Sega's software research and development teams began with one development division operating under Sega's longtime head of R&D, Hisashi Suzuki. As the market increased for home video game consoles, Sega expanded with three Consumer Development (CS) divisions. After October 1983, arcade development expanded to three teams: Sega DD No. 1, 2, and 3. Some time after the release of Power Drift, the company restructured its teams again as the Sega Amusement Machine Research and Development Teams, or AM teams. Each arcade division was segregated, and a rivalry existed between the arcade and consumer development divisions.[276] In what has been called "a brief moment of remarkable creativity",[130] in 2000, Sega restructured its arcade and console development teams into nine semi-autonomous studios headed by the company's top designers.[2][151][277] The studios were United Game Artists, Smilebit, Hitmaker, Sega Rosso, Sega Wow, Overworks, Amusement Vision, Sega AM2, and Sonic Team.[130][278] Sega's design houses were encouraged to experiment and benefited from a relatively lax approval process.[279] After taking over as company president in 2003, Hisao Oguchi announced his intention to consolidate Sega's studios.[198] Prior to the acquisition by Sammy, Sega began the process of re-integrating its subsidiaries into the main company.[280] Toshihiro Nagoshi, formerly the head of Amusement Vision, recalls this period, "in many ways a labour of love" from Sega, teaching the creatives the experience of managing a business.[281]

Sega still operates first-party studios as departments of its research and development division. Sonic Team exists as Sega's CS2 research and development department,[282] while Sega's CS3 department has developed games such as Phantasy Star Online 2,[283] and Sega Interactive's AM2 department has more recently worked on projects such as smartphone game Soul Reverse Zero.[284] Toshihiro Nagoshi remains involved with research and development as Sega's chief creative officer while working on the Yakuza series.[285]