Short: The Death of Sega

Acquired's first "Short": some stories deserve three-plus hours, but some chapters can be told in about an hour. The origin: in Nintendo part two, Ben asked how Sega went from over half the US console market with Genesis to abandoning consoles after Dreamcast in a few short years — David gave the short answer, and they both felt the story deserved its own episode. Also an opportunity to study a company that didn't become hugely successful. Housekeeping: the Slack (acquired.fm/slack, buzzing with gaming discussion after the Nintendo episodes), the ACQ2 interview show (most recent: Retool founder/CEO David Hsu), and the disclaimer — technically they could still invest in Sega Sammy Holdings.

The conventional narrative, told first: 1992–93, Sega and Genesis have battled Nintendo's Super NES to a tie in the US home console market ("in practice, beating the pants off of Nintendo") — a startup reaching ~50/50 share against an incumbent in three years. Genesis was the cool 90s console: Sonic, John Madden Football, great sports franchises, the Mortal Kombat with the real red blood (not Nintendo's toned-down gray). ~30 million Genesis units installed worldwide, ~20 million in the US — huge for the era (nothing sold 100M+ then; the PS2's 150M came years later). CDs were clearly the future (album sales and CD players fueling Sony; CD-ROM becoming standard in PCs), with the trade-off of load times versus cartridges, but a huge business-side advantage: CDs cost a tenth to a hundredth of cartridges to stamp out. The industry assumed the CD migration would happen via add-on peripherals to existing consoles — in hindsight a mercifully dead evolutionary branch, but everyone did it (Atari Jaguar's CD add-on, NEC/TurboGrafx's CD, and famously Nintendo's announced Sony partnership for the Super Nintendo "Play Station" add-on — which, as listeners of the Sony and Nintendo episodes know, didn't go as planned).

Sega's CD add-on: the Sega CD launched late 1992 in North America, debuting with Night Trap — a full-motion-video "playable movie" (a really crappy zombie/teen-horror game people thought was the CD-ROM future) that helped get Congress spun up about video games corrupting the youth and led to the creation of the ESRB ("Rated E for everyone"; compared to Call of Duty or GTA today, it's nothing). The structural problem with add-ons: the console business is a razor-and-blades model — all profit from software, so you want the biggest possible installed base — and an add-on limits the market to the ~30M existing Genesis owners by definition. Developers won't make their best games for a limited base; consumers won't buy a platform with few good games: a death spiral. Sega CD sold ~3 million units versus 30M+ Genesis — a flop. Nintendo, by luck, skill, or just being slow, never shipped its CD add-on (the Sony deal fell apart; the Philips partnership delayed everything into abandonment, leaving the unsupported, terrible CD-i) and avoided the disaster Sega stumbled into.