Sega

History

1940–1982: Origins and arcade success

In May 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 established Service Games the next year, named for the military focus. After the US 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 US bases in Japan. 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. The name Sega, an abbreviation of Service Games, was first used in 1954 on a slot machine, the Diamond Star.

Due to notoriety arising from investigations by the US government into criminal business practices, Service Games of Japan was dissolved on May 31, 1960. On June 3, Bromley established two companies to take over its business activities, Nihon Goraku Bussan and Nihon Kikai Seizō. 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. The companies merged in 1964, retaining the Nihon Goraku Bussan name.

Around the same time, David Rosen, an American officer in the United States Air Force stationed in Japan, launched a photo booth business in Tokyo in 1954. 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. 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. Its imports included Rock-Ola jukeboxes, pinball games by Williams, and gun games by Midway Manufacturing.

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. The first arcade electro-mechanical game (EM 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 then 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 US. Sega was surprised by the success, and for the next two years, the company produced and exported between eight and ten games per year. The worldwide success of Periscope led to a "technological renaissance" in the arcade industry, which was reinvigorated by a wave of "audio-visual" EM novelty games that followed in the wake of Periscope during the late 1960s to early 1970s. However, rampant piracy led Sega to cease exporting its games around 1970.

1982–1989: Entry into the game console market, management buyout and arcade resurgence

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. 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. 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. Rebranded versions of the SG-1000 were released in several other markets worldwide. The SG-1000 sold 160,000 units in 1983, which far exceeded Sega's projection of 50,000 in the first year 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.

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 CEO of Sega. 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. Nakayama and Rosen arranged a management buyout of the Japanese subsidiary in 1984 with financial backing from Computer Service, a prominent Japanese software company. 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, while Nakayama was installed as CEO of Sega Enterprises, Ltd.

In 1985, Sega began working on the Mark III, a redesigned SG-1000. For North America, Sega rebranded the Mark III as the Master System, with a futuristic design intended to appeal to Western tastes. The Mark III was released in Japan in October 1985. 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. 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. Ineffective marketing by Tonka handicapped sales of the Master System. By early 1992, production had ceased in North America. The Master System sold between 1.5 million and 2 million units in the region. This was less market share in North America than both Nintendo and Atari, which controlled 80 percent and 12 percent of the market. The Master System was eventually a success in Europe, where its sales were comparable to the NES. As late as 1993, the Master System's active installed user base in Europe was 6.25 million units. The Master System has had continued success in Brazil. New versions continue to be released by Sega's partner in the region, Tectoy. By 2016, the Master System had sold 8 million units in Brazil.

1989–1994: Genesis, Sonic the Hedgehog, and mainstream success

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. 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, with the latter launching a new publication dedicated to the console, but Sega shipped only 400,000 units in the first year.

The Mega Drive struggled to compete against the Famicom and lagged behind Nintendo's Super Famicom and the TurboGrafx-16, made by NEC, in Japanese sales throughout the 16-bit era. 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. The European version of the Mega Drive was released in September 1990.

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, with slogans including "Genesis does what Nintendon't". 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. Nonetheless, Sega had difficulty overcoming Nintendo's ubiquity in homes. Sega of America sold only 500,000 Genesis units in its first year, half of Nakayama's goal.

After the launch of the Genesis, Sega sought a new flagship line of releases to compete with Nintendo's Mario series. Its new character, Sonic the Hedgehog, went on to feature in one of the best-selling video game franchises in history. 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. 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.

1994–1998: 32X, Saturn, falling console sales, and continued arcade success

Sega began work on the Genesis' successor, the Sega Saturn, more than two years before showcasing it at the Tokyo Toy Show in June 1994. 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. The 32X would not be compatible with the Saturn, but would play Genesis games. 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. After the holiday season, interest in the 32X rapidly declined.

Sega released the Saturn in Japan on November 22, 1994. 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. Sega's initial shipment of 200,000 Saturn units sold out on the first day, and it was more popular than the PlayStation, made by Sony, in Japan. In March 1995, Sega of America CEO Tom Kalinske announced that the Saturn would be released in the US on Saturday, September 2, 1995, advertised as "Saturn-day". Sega executives in Japan mandated an early launch to give the Saturn an advantage over the PlayStation. 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. A by-product of the surprise launch was the provocation of retailers not included in Sega's rollout; KB Toys in particular decided to no longer stock its products in response.

The Saturn's release in Europe also came before the previously announced North American date, on July 8, 1995. Within two days of the PlayStation's American launch on September 9, 1995, the PlayStation sold more units than the Saturn. Within its first year, the PlayStation secured over twenty percent of the US video game market. The console's high price point, surprise launch, and difficulty handling polygonal graphics were factors in its lack of success. Sega also underestimated the continued popularity of the Genesis; 16-bit sales accounted for 64 percent of the market in 1995. Despite capturing 43 percent of the US market dollar share and selling more than 2 million Genesis units in 1995, Kalinske estimated that, if prepared for demand, another 300,000 could have been sold.

1998–2001: Dreamcast and continuing struggles

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. Sega announced that Sonic Adventure, the first major 3D Sonic the Hedgehog game, would be a Dreamcast launch game. It was promoted with a large-scale public demonstration at the Tokyo Kokusai Forum Hall. Due to a high failure rate in the manufacturing process, Sega could not ship enough consoles for the Dreamcast's Japanese launch. As more than half of its limited stock had been pre-ordered, Sega stopped pre-orders in Japan. 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. NAOMI shared technology with the Dreamcast, allowing nearly identical ports of arcade games.

The Dreamcast launched in Japan on November 27, 1998. The entire stock of 150,000 consoles sold out by the end of the day. Irimajiri estimated that another 200,000 to 300,000 Dreamcast units could have been sold with sufficient supply. 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. 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. Before the Western launch, Sega reduced the price of the Dreamcast in Japan by JP¥9,100, effectively making it unprofitable but increasing sales.

On August 11, 1999, Sega of America confirmed that Stolar had been fired. Peter Moore, whom Stolar had hired as a Sega of America executive only six months before, was placed in charge of the North American launch. The Dreamcast launched in North America on September 9, 1999, with 18 games. 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". Within two weeks, US Dreamcast sales exceeded 500,000. By Christmas, Sega held 31 percent of the US video game market by revenue. On November 4, Sega announced it had sold more than a million Dreamcast units. 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. Sega released the Dreamcast in Europe on October 14, 1999. While Sega sold 500,000 units in Europe by Christmas 1999, sales there slowed, and by October 2000 Sega had sold only about a million units. Shenmue became the most expensive game ever developed at the time, reported to have cost Sega $70 million. In 2011, Suzuki said the figure was closer to $47 million including marketing. Development also covered some of Shenmue II (2001), which was completed for a smaller amount, and groundwork for future Shenmue games.

2001–2003: Shift to third-party software development

CSK chairman Isao Okawa replaced Irimajiri as president of Sega on May 22, 2000. Okawa had long advocated that Sega abandon the console business. 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. 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. Sega announced an official company name change from Sega Enterprises, Ltd. to Sega Corporation effective November 1, 2000, officially dropping the Sega Enterprises name used in Japan as well as transitioning to the Sega name used globally. Sega stated in a release that this was to display its commitment to its "network entertainment business".

On January 23, 2001, Japanese newspaper Nihon Keizai Shinbun reported that Sega would cease production of the Dreamcast and develop software for other platforms. After an initial denial, Sega 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". 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 Dreamcast price reduction to eliminate its unsold inventory, estimated at 930,000 units as of April 2001. This was followed by further reductions to clear the remaining inventory. 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 all 55 first-party Dreamcast games through a competition organized by GamePro.

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. He held failed talks with Microsoft about a sale or merger with its Xbox division. 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". A business alliance with Microsoft was announced whereby Sega would develop 11 games for the Xbox. As part of the restructuring, nearly one third of Sega's Tokyo workforce was laid off in 2001. 2002 was Sega's fifth consecutive fiscal year of net losses.

2003–2015: Sammy takeover and business expansion

In August 2003, Sammy bought 22.4 percent of Sega's shares from CSK, making Sammy Sega's largest shareholder. 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. Successful console games during this period include entries in the Sonic the Hedgehog, Puyo Puyo, Virtua Fighter, Super Monkey Ball, Phantasy Star Online and Sakura Wars franchises. 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, while Sammy feared stagnation and over-reliance of its highly profitable pachislot and pachinko machine business and wanted to diversify. Sammy acquired the remaining percentages of Sega, completing a takeover. The stock swap deal valued Sega between $1.45 billion and $1.8 billion. 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).

According to an industry survey, as of 2005, sales of arcade machines were up for the previous four years in Japan, while down for nine straight years overseas. In response to the decline of the global arcade industry in the late 1990s, Sega created several novel concepts tailored to the Japanese market. Derby Owners Club was an arcade machine with memory cards for data storage. Testing of Derby Owners Club in a Chicago arcade showed that it had become the most popular machine at the location, with a 92% replay rate. The cabinet was too expensive and the game did not entice casual users which are essential to the western arcade market. While the Japanese market retained core players, western arcades had become more focused on casual players, and Sega Amusements Europe, the entity created to officially distribute and manufacture Sega's machines on the continent after the consolidation of its regional divisions, subsequently decided to develop more games locally that were better suited to western tastes.

In 2005, the GameWorks chain of arcades came under the sole ownership of Sega, which previously was shared with Vivendi Universal, and remained under its ownership until 2011. In 2009, Sega Republic, an indoor theme park, opened in Dubai. Sega gradually reduced its arcades from 450 in 2005 to around 200 in 2015. 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.

2015–2020: Sega Games and Sega Interactive

In April 2015, Sega Corporation was reorganized into Sega Group, one of the 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. As a result, Sega Corporation rebranded itself to Sega Games Co., Ltd. and continued to manage home video games, while Sega Interactive Co., Ltd. was founded to take control of the arcade division. Sega Networks merged with Sega Games in 2015. 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. Effective from January 2017, 85.1% of the shares in Sega's theme park business became owned by China Animations Character Co., renaming the former Sega Live Creation to CA Sega Joypolis.

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 by January 2018. This was to consolidate scattered head office functions including Sega Sammy Holdings, Sammy Corporation, Sega Holdings, Sega Games, Atlus, Sammy Networks, and Dartslive. Sega's previous headquarters in Ōta was sold in 2019.

In June 2017, Chris Bergstresser replaced Jurgen Post as president and COO of Sega Europe. In June 2018, Gary Dale, formerly of Rockstar Games and Take-Two Interactive, replaced Chris Bergstresser as president and COO of Sega Europe. 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. 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.

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, which was released in September 2019. In May 2019, Sega acquired Two Point Studios, known for Two Point Hospital.

2020–present: Recent history

As part of its 60th anniversary, Sega announced the Game Gear Micro microconsole for release on October 6, 2020, in Japan. Other anniversary projects include the Astro City Mini and several other merchandise. Sega also announced its Fog Gaming platform, which uses the unused processing power of arcade machines in Japanese arcades overnight to help power cloud gaming applications.

Sega made a number of restructuring moves in the early 2020s. During the latter half of 2020, many of the financial gains Sega made in the earlier part of the year dissolved due to the impact of the COVID-19 pandemic on its Sega Entertainment division, which ran its arcades. That November, Sega Sammy sold 85.1% of its shares in the division to Genda Inc., though the Sega branding and coin-operated machines continued to be used in arcades. Arcade game development was unaffected by the sale. In January 2022, Sega sold the remaining portion of this division to Genda. Sega Amusement International was sold via a management buyout to Kaizen Entertainment, however the Sega brand will still be used for all games and the company name remains through a royalty agreement. Sega Group Corporation was formally dissolved by its parent company in 2021.

Contrasting its losses brought forth by amusement operations in 2020, sales and critical reception of Sega's home console games improved; Metacritic named Sega the best publisher of the year in 2020. Of its 28 releases that year, 95% had "good" Metacritic scores (above 75/100), including two with "great" scores (above 90/100 for Persona 5 Royal and Yakuza 0), with an average Metacritic score of 81.6 for all 2020 Sega releases. Phantasy Star Online 2 was reported in 2021 to have made over US$900 million since its release in 2012. In 2022, Sega announced its "Super Game" project, a series of high-budget games expected to generate lifetime sales of US$672 million, and allocated about US$200 million into its budget across three years. The project was canceled in May 2026 after Sega retreated from free-to-play games. In 2023, Sega acquired the Finnish video game developer Rovio Entertainment, known for the Angry Birds series, for US$776 million.

On April 24, 2023, 144 Sega of America employees announced plans to file a new union election under the new labor union, Allied Employees Guild Improving Sega (AEGIS), which is allied with the Communication Workers of America via CWA Local 9510. AEGIS represents workers from departments including marketing, quality assurance, development and localization, making it the first of its kind in the game industry in the United States. On July 10, 2023, it was announced that workers had voted 91–26 to form the union. AEGIS is undergoing certification with the National Labor Relations Board before going into bargaining.

Corporate structure

Since 2004, Sega has been a subsidiary of Sega Sammy Holdings. Sega's global headquarters are in Shinagawa, Tokyo, Japan. Sega also has offices in Irvine, California (as Sega of America), in London (as Sega Europe), in Seoul, South Korea (as Sega Publishing Korea), and in Singapore, Hong Kong, Shanghai, and Taipei. In other regions, Sega has contracted distributors for its games and consoles, such as Tectoy in Brazil. Sega has had offices in France, Germany, Spain, and Australia; those markets have since contracted distributors.

Relations between the regional offices have not always been smooth. Some conflict in the 1990s may have been caused by Sega president Nakayama and his admiration for Sega of America; according to Kalinske, "There were some guys in the executive suites who really didn't like that Nakayama in particular appeared to favor the US executives. A lot of the Japanese executives were maybe a little jealous, and I think some of that played into the decisions that were made." By contrast, author Steven L. Kent said Nakayama bullied American executives and that Nakayama believed the Japanese executives made the best decisions. Kent also said Sega of America CEOs Kalinske, Stolar, and Moore dreaded meeting with Sega of Japan executives.

Subsidiaries of Sega Corporation

After the formation of Sega Group in 2015 and the founding of Sega Holdings, the former Sega Corporation was renamed Sega Games Co., Ltd. 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. The two were consolidated in 2020, renamed as Sega Corporation, and Sega Group Corporation was formally absorbed into Sega Corporation in 2021. The company includes Sega Networks, which handles game development for smartphones. Sega Corporation develops and publishes games for major video game consoles 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."

Sega Fave Corporation, originally known as Yonezawa Toys and acquired by Sega in 1991, 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.

Since the late 1960s, Sega has been affiliated with operations of bowling alleys and arcades through its former Sega Entertainment Co., Ltd. subsidiary in Japan, as well as a number of other smaller regional subsidiaries in other countries. Initiatives to expand operations in other territories, such as the US, UK, France, Spain, and Taiwan, have been more short-lived, and following the 85.1% majority acquisition of Sega Entertainment's shares in November 2020 to mitigate losses caused by the COVID-19 pandemic, Sega's arcades in Japan since have been run under Genda Incorporated's Genda GiGO Entertainment division. Its DartsLive subsidiary creates electronic darts games, while Sega Logistics Service distributes and repairs arcade games.

Research and development

Sega releases games developed by 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 video games. Sega has also acquired third-party studios including Atlus, Play Heart, Creative Assembly, Hardlight, Sports Interactive, Two Point Studios, and Rovio Entertainment.

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, Sega 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.

In what has been called "a brief moment of remarkable creativity", in 2000, Sega restructured its arcade and console development teams into ten semi-autonomous studios headed by the company's top designers. The studios were United Game Artists, Smilebit, Hitmaker, Sega Rosso, WOW Entertainment, Overworks, Wave Master, Amusement Vision, Sega-AM2, and Sonic Team. Sega's design houses were encouraged to experiment and benefited from a relatively lax approval process. After taking over as company president in 2003, Hisao Oguchi announced his intention to consolidate Sega's studios. Prior to the acquisition by Sammy, Sega began the process of re-integrating its subsidiaries into the main company. Toshihiro Nagoshi, formerly the head of Amusement Vision, recalls this period as "in many ways a labour of love" from Sega, teaching the creatives the experience of managing a business.

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, while Sega's CS3 or Online department has developed games such as Phantasy Star Online 2, and Sega's AM2 department has more recently worked on projects such as smartphone game Soul Reverse Zero. Toshihiro Nagoshi remained involved with research and development as Sega's chief creative officer or creative director while working on the Yakuza series until 2021. Other studios include Ignited Artists and Play Heart.

Legacy

Sega is one of the world's most prolific arcade game producers, having developed more than 500 games, 70 franchises, and 20 arcade system boards since 1981. It has been recognized by Guinness World Records for this achievement. Of Sega's arcade division, Eurogamer's Martin Robinson said, "It's boisterous, broad and with a neat sense of showmanship running through its range. On top of that, it has something that's often evaded its console-dwelling cousin: success." Hideki Sato, who developed most of Sega's hardware has said a major failure of Sega has been not integrating its arcade and console divisions more for synergy.

The Sega Genesis is often ranked among the best consoles in history. In 2014, USgamer's Jeremy Parish credited it for galvanizing the market by breaking Nintendo's near-monopoly, helping create modern sports game franchises, and popularizing television games in the UK. Kalinske felt Sega had innovated by developing games for an older demographic and pioneering the "street date" concept with the simultaneous North American and European release of Sonic the Hedgehog 2. Sega of America's marketing campaign for the Genesis influenced marketing for later consoles.

Despite its commercial failure, the Saturn is well regarded for its library, though it has been criticized for a lack of high-profile franchise releases. Edge wrote that "hardened loyalists continue to reminisce about the console that brought forth games like Burning Rangers, Guardian Heroes, Dragon Force, and Panzer Dragoon Saga." Sega's management was criticized for its handling of the Saturn. According to Greg Sewart of 1Up.com, "the Saturn will go down in history as one of the most troubled, and greatest, systems of all time".

The Dreamcast is remembered for being ahead of its time, with several concepts that became standard in consoles, such as motion controls and online functionality. Its demise has been connected with transitions in the video game industry. In 1001 Video Games You Must Play Before You Die, Duncan Harris wrote that the Dreamcast's end "signaled the demise of arcade gaming culture... Sega's console gave hope that things were not about to change for the worse and that the tenets of fast fun and bright, attractive graphics were not about to sink into a brown and green bog of realistic war games." Parish contrasted the Dreamcast's diverse library with the "suffocating sense of conservatism" that pervaded the industry in the following decade.

Companies founded by ex-employees

Over the years, and like with other large game companies in Japan (such as Capcom and Square), a number of staff members have left the company to start their own studios. Among the first of these was Arc System Works, founded in 1988 by programmer Minoru Kidooka.

Hiroshi Hamagaki and Tomo Kimura left in October 1990 to start Genki, which would go on to develop the popular Tokyo Xtreme Racer (Shutokō Battle) series.

After working as designer for the first two Tekken games for Namco, Virtua Fighter designer Seiichi Ishii founded DreamFactory in November 1995 as a subsidiary of Square, bringing with him many Sega (as well as Namco) employees. DreamFactory developed Tobal No. 1, its sequel, and Ehrgeiz, as well as The Bouncer. Amidst financial troubles at Square, DreamFactory split from the company in 2001 to become independent. As of 2024, Ishii (who now lives in Montreal) continues to manage the studio from his home.

Adrian Stephens and Peter Morawiec of Sega Technical Institute founded Luxoflux in January 1997 after Sega of America shuttered STI in December 1996. Luxoflux developed Vigilante 8 and the True Crime series for Activision, which acquired the studio in October 2002. Activision closed Luxoflux in February 2010. Stephens and Morawiec had already left the studio in 2006 and, the following year, established Isopod Labs, which developed Vigilante 8 Arcade.

Marvelous Entertainment was established in 1997 by Haruki Nakayama (son of then-Sega president Hayao Nakayama), who was in charge of the media mix development of Sakura Wars. In 2011, Marvelous merged with AQ Interactive and Liveware to become MarvelousAQL (now the second incarnation of Marvelous).

After a short stint at General Entertainment, where he worked on Pen Pen TriIcelon, former Sega marketer Masanobu Tsukamoto founded Land Ho! in 1999 with members of the General team who had also worked on the game.

Artoon was founded on August 27, 1999 by Sonic the Hedgehog co-creator Naoto Ohshima and executive Yoji Ishii, and was composed of Sonic Team and Team Andromeda members, such as Manabu Kusunoki (art director for the Panzer Dragoon series). Artoon developed Blinx: The Time Sweeper, as well as Yoshi's Island DS for Nintendo and working with Mistwalker on Blue Dragon. Becoming a wholly-owned subsidiary of AQ Interactive in 2005, the studio was absorbed into AQ in 2010, and Ohshima, Ishii, and key Artoon members formed a successor around the same time, Arzest.