Think of a traditional theme park. Acres of concrete walkways winding through some nutty genius's carefully manicured personal fantasy. But Walt Disney is dead. Long live Douglas Trumball. The creation of Luxor, a multimedia theme park cum casino, replete with state-of-the-art Sega arcade (see Wired 1.5, page 66), further solidifies the basic assumption behind Sega's business: Entertainment and leisure are going interactive. With the right setup (floor-to-ceiling screens, a motion-based platform, and a few Crimson Reality Engines cranking out hi-res images), you can take Disneyland and cram it into a pod about the size of a Dodge Caravan. Sega has, and it's called the AS-1, installed now in major theme parks but coming soon to a mall near you. Take the AS-1 concept and expand it - a theatre-sized AS-1 running a roller coaster simulation, a personal AS-1 running a demolition derby simulation (linked to 25 or so others running the same derby across the country). Toss in a few hot dog stands, a whizzy central plaza, and some merchandising operations and you have the basis for some pretty profitable theme parks. Certainly Sega has competitors in this new field - St. Louis-based Edison Brothers and Chicago-based Virtual World Entertainment among them - but successful as these companies might be, they don't have Sega's plans, and they don't have Sega's money.

a scene from Megalopolis , another AS-1 ride.

Over the course of the next five years, Sega plans to open more than 100 of these VRcades worldwide. Each will cost from US$10-$50 million to build, but think of the revenue they'll create: As Luxor effects wizard Trumball points out, people will stand in line for an hour and pay US$15 for a five- minute experience. It just has to be the right experience.

The United States's US$6-billion-a-year theme park industry may be growing at a tepid rate of 5 percent, but Sega knows the experience business. It's been providing experiences to more than 1,200 video arcades across Japan, where many of its high-resolution games first appear before they are transitioned to the home market. It is here, in the arcades, that Sega introduced Virtual Racing, a wildly successful racing pod and precursor to the personal AS-1 described above. In the past year, Sega has expanded into Taiwan and Europe, and amusement center income grew from US$311 million to US$506 million. Sega also raked in US$502 million on sales of its arcade machines to third-party amusement centers.

The arcade business gives Sega more than a billion-dollar revenue stream. It also serves as a research and development laboratory. "We look at it as a continuum of experience," says Doug Glen, group vice president of business development and strategic planning for Sega of America. "You can leverage the asset from the highest end down to the mass-market - the home. We get into the leading edge and nurture the experience throughout its various manifestations."

Does that mean we'll someday have an AS-1 in the home?

"Beyond the shadow of a doubt," he asserts.

Given Sega's aggressive plan to storm the US market, was it pure coincidence that on the Fourth of July The New York Times devoted half of the front page of its business section to a photo of Nakayama, smiling atop Sega's AS-1, the headline proclaiming: "Sega Takes Aim at Disney's World"? Mickey is probably shaking in his buttonless boots.

How Did They Do It?

Sega may be aiming for Disney's world, but the company is no Disney. It wants to be bigger than Disney (and its employees are allowed to wear their hair long and sport beards, if it means they program faster.)

Founded in 1954 by David Rosen, an American entrepreneur who is still active at Sega (as co-chairman of Sega of America), Sega was a US company before it became a Japanese one.

Coming out of the Air Force after a tour of duty in Tokyo, the 20-year-old Brooklyn native saw that Japanese people needed lots of ID photographs, but that local photo studios were slow and expensive. To cater to this need, he established Rosen Enterprises and went into the instant photo booth business. The booths were a big success, growing quickly into a nationwide chain. More significantly, Rosen established relationships with theaters and department stores that would later prove crucial in getting his next business off the ground.

In 1957, the Korean War had just ended and Japan's economy was starting to boom - for the first time the Japanese had some disposable income. To Rosen, this meant the time was ripe to get into entertainment. The vehicle that he chose - arcade games - were unknown in Japan. Rosen headed for Chicago, headquarters of many of the world's largest makers of arcade games. Reasoning that there was no point in putting the latest products in front of an unsophisticated market, he shrewdly invested in used games. Japanese theaters and department stores gave him space to operate, and within a few years Rosen had established some 200 arcades nationwide. In those days, his only competition came from Service Games (or SeGa), another American-owned firm whose original business was jukeboxes and fruit machines.

From Rosen's point of view, the most interesting thing about his rival was that they had a factory, and he needed the ability to manufacture. By the early 1960s, the Japanese arcade market had caught up with the US. The problem was that games makers had nothing new to offer, they were merely making cosmetic changes to old games. "We had to have design and manufacturing of new products for our operation," Rosen recalls. In 1965, the two companies merged to form Sega Enterprises, a Japanese company, with Rosen as CEO.

Rosen designed the company's first game himself. In Periscope, the object was to "sink" chain-mounted cardboard ships. You lined the targets up in the sights of the submarine's periscope, then pressed a button to fire "torpedoes" - represented by lines of colored lights - at them. Crude by today's standards, but Periscope was a big hit. Its fame spread to arcade operators elsewhere, who traveled to Japan to see the game. Sega exported Periscope to Europe and the US, where it became the first 25-cent game (all previous arcade games cost either a nickel or a dime). Encouraged by this success, Sega followed up with a series of other games, all using the latest electronic technology. "We were doing lots of things that hadn't been done before," Rosen recalls, "like adding sound and special effects." State-of-the-art technology became, and still is, the company's trademark.

The One That Got Away

By the late '60s, Rosen decided to take Sega public, but for an American to do that in Japan would have been unprecedented. He was advised that going public in the US would be easier. In the hunt for a US-based partner, Rosen settled on Gulf + Western, which purchased Sega outright in 1969. G+W took its acquisition public in 1974, leaving Sega Japan as a subsidiary. Hayao Nakayama, a former Sega distributor, was drafted as the subsidiary's president.

During the late '70s and early '80s, the game industry - which with the arrival of Atari now included a consumer segment - went through a huge boom followed by a catastrophic bust. Wondering what to do with its apparently worthless Japanese property, Gulf + Western turned to Nakayama, who, anxious to move Sega into the consumer marketplace, suggested a management buy-out. This was arranged, and with financial backing from CSK, a leading Japanese software house, in 1984 Sega became a Japanese company once again for the paltry price of US$38 million.

(Gulf + Western's other entertainment property, Paramount, was retained, and G+W later took the Paramount name as its own. Like most other studios, Paramount is scrambling to get into interactive software. The movie business is flat: Last year Paramount posted sales of US$4.6 billion, but only US$285 million in profits. Just for comparison's sake, in the same period ex-subsidiary Sega posted profits of US$817 million on US$3.6 billion in sales. As Homer Simpson might say, were he a Paramount executive instead of a character in several hot-selling Sega games, dooooh!)

Left to fend for itself in an increasingly competitive industry, Sega was stunned by the huge success of Nintendo's original, 8-bit Entertainment System, which shipped in 1985. In Japan, where Nintendo has locked in software developers, distributors, and retailers, Sega has never really recovered. But in the more open markets of Europe and the US, it has been quite a different story.

Deborah Harry on the set of Switch (a working title for the recent Sega CD release.

In Europe, Sega beat Nintendo to market with both 8- and 16-bit machines. Until this year, when it was eclipsed by Sega of America, Sega Europe accounted for the largest share of the company's consumer revenues. In the US, Sega lost the 8-bit battle, then fought back with the Genesis, introduced at the Las Vegas Consumer Electronics Show in June 1989. At first, Rosen recalls, it was an uphill struggle to persuade people that there was an appreciable difference between 8-bit and 16-bit machines. Nintendo, predictably, tried to convince the world that the Genesis was unnecessary. Sega's archrival produced a video that showed a hot-air balloon marked "16-bit" being punctured by a pin-wielding Super Mario. But in clinging to outmoded technology, Nintendo made a serious blunder.

"The giant went to sleep for two years," says Bishop Cheen, senior analyst with Kagan Associates in Carmel, California. "They woke up and it was too late."

The Kyoto-based Nintendo gave Sega a precious headstart in the next- generation marketplace. This in turn gave developers time to gain familiarity with the Sega machine.

One such developer, who had a passel of hits on Nintendo's 8-bit platform and had recently signed several stars to software licensing deals, recounts an introductory dinner he had with Nakayama directly after the Genesis launch in 1989. The developer told Nakayama that his company was interested in porting its hit games over to Sega. Both he and Nakayama knew this was potential suicide: At the time, Nintendo forced all of its developers to sign non-competition agreements; breaking them meant losing Nintendo's license.

"Nakayama turned to me," the developer recalls, "and said, 'Not yet. Right now you have more to gain by staying loyal to Nintendo until we grow our hardware base. Then you can come over.'" It was typical Nakayama business savvy - keep your cards close to the vest until playing them has the most dramatic impact.

In 1990, under pressure from Congress, the DOJ, and several lawsuits, Nintendo rescinded its exclusivity requirements. The developer, who still prefers to be anonymous, is now making a killing in the Sega market.

a child reacts with glee when Sonic appears at a recent AIDS awareness benefit.

By the time the 16-bit Super Nintendo Entertainment System was launched in August 1991 - six months earlier than originally intended - games for the Genesis were already into their second and third generations, and the Genesis itself had sold more than a million units. At the same time, Sega of America came on strong with the aggressive marketing campaign blessed by Nakayama and engineered by Kalinske. The campaign's theme, "arcade entertainment for the home," drew directly on Sega's roots. The comparative ads graphically touted the superiority of Sega's machines. Genesis became the cool machine to own, the one big brother played with. In schoolyards across America, Nintendo was relegated to younger kids. "Nintendo too narrowly defined its market to be 8- to 14- year-old boys," says Steve Eskenazi, senior analyst with Alex Brown & Sons in New York. "Sega said forget that, we're going to target the older crowd. It captured the high ground."

The Window of Opportunity
In a nondescript ballroom early last year at the Redwood City, California Holiday Inn, the Goodby, Berlin & Silverstein advertising agency was engaged in a US$45 million gamble. The tacky, velvet-curtained room had been transformed into a combination stadium and stage. With a sound system provided by the same folks who do Dead concerts, the agency's entire staff sat in festooned bleachers, cheering and playing Sega video games rigged to towering walls of video monitors. It was quite a spectacle, and the twenty or so Sega executives sitting at mid-field were clearly impressed.

Goodby was looking to win the Sega account, which Sega had put up for review. Instead of presenting a standard pitch - the numbers, the market research, the pie charts - Goodby decided to have some fun. That was, after all, the whole point of Sega's business. Sega bit; Goodby won the account.

Associate Planning Director Irina Heirakuji spent months in the bedrooms, living rooms, and homes of America's youth, filming what kids wanted, what kids said, and why kids thought Sega was cool. She found that while most were married to the 8-bit NES system, they lusted in their hearts for Sega. "There was this base level of dissatisfaction with Nintendo," she says. "Not many kids had Sega, but they went to the homes of those that did."

With momentum in the US and clear market dominance in Europe, 1992 became the year Sega went for Nintendo's jugular.

"We knew that we would have to make Sega a cultural phenomenon if we were going to beat Nintendo," Heirakuji says. "We told Sega, 'OK, if you're going to bust it, now's the time, because Nintendo is starting to react.' "

Goodby produced 35 commercials in less than four months, the first of which debuted not during Saturday morning cartoons, but on the MTV Music Awards. "We had a window of opportunity (leading up to Christmas 1992)," says Greg Stern, account director for the Sega account. "Kids don't want to see the same commercial over and over again. We focused on new games and branding the Sega image."

Heirakuji's research and the frenetic ads that sprung from it captured the post-MTV mores of a culture hooked on visual images, an impatient culture that absorbs and processes information literally in four-frame riffs. In schoolyards, living rooms, workplaces, even in bars and other "grown-up" venues, perfectly normal folk might look at each other, pause for a pregnant second, then exclaim with lunatic eyes: SEGA!

And Sega became cool because Sega took chances with mass-media-defined morality. When Acclaim Entertainment released its bloody Mortal Kombat game in September, the Sega version let you rip off heads and tear out hearts. The Nintendo version was sanitized. Sega's version outsold Nintendo two to one. (In an unusual twist, Mortal Kombat, the movie, is now in the planning stages. No word on if it will be "R" or "PG" rated.)

The folks at Goodby Berlin are particularly proud of a current spot for Sega's Game Gear portable that pokes fun at Nintendo's monochrome GameBoy portable. "Some people are content to be entertained by simple one-color electronics," an announcer intones as we watch a family of porch-sitting Southern stereotypes chuckle idiotically as a bug-zapper methodically wastes hapless insects. "Somehow these people have just never heard of Game Gear, the multicolor portable from Sega with tons of new titles. Yeah, some people are like that. But then some people like to eat pickled pork lips too."

Thereupon, the father of the family, who bears a striking resemblance to Homer Simpson's beer-guzzling friend Barney, slurps up a fistful of pig lips, a gross factor of ten-plus, and a big hit with kids looking for something to talk about at school tomorrow.

Sega of America

Sega's phenomenal growth over the past three years can be directly mapped to the stunning growth of its largest division, Sega of America. From a staff of 35 in 1989, Sega of America has shot up to its present strength of close to 700 today. "In the early days I likened it to a start-up company with money," says Clyde Grossman, former group director of product development at Sega, now VP of publishing for Spectrum Holobyte. "It seems like we were constantly hiring - we'd put procedures into place, and then we'd outgrow them."

In two years, according to Ellen Beth Van Buskirk, director of marketing services, Sega of America has become the largest producer of video games in the world.

Here, among the stark, functional office parks of Redwood City, California, Sega creates the lion's share of the software sold for the Genesis in America and Europe. Here Sega has established its multimedia studio, charged with creating compelling next-generation software that will turn Sega's CD player into a must-have peripheral. Here also is the Sega Technical Institute, a games shop so secret, product managers are not allowed inside to see how the latest versions are coming along.

Wandering among these cluttered hallways, inflatable Jurassic dinos spilling out of equipment-packed cubicles, I can't help but conclude that this place holds the collective dreams of the Atari generation, a generation that either built or grew up with the first wave of video games, lost interest, and is now spending well near all its time trying to find the magic again. As I walk past a Silicon Graphics Indigo rendering a raptor for the Jurassic Park CD, I realize that these people aren't making games for the kids, they're making games for themselves. The kids are just the lucky initial target market. Here in the multimedia studio, programmers, musicians, filmmakers, and animators are working toward the day when they can create games so sophisticated that playing them will seem about as unusual as going to the movies.

"The (video game) industry has been through several cycles, but it's at the point now where it is clearly going to be here for good, in a real, tangible form," says Joe Miller, who as VP of product development is responsible for all of SOA's development efforts. "It is now a matter of how the industry evolves as a whole."

Two crucial indicators of that evolution are the Sega Channel and The Edge 16, both alliance-driven ventures that dramatically extend the purpose and potential of Sega's Genesis. Both extend gameplay outside the home, the former through coaxial cable lines, the latter through the copper telephone wire. In the looming turf battle for on-ramps to the information superhighway, Sega is covering all the bases.

The Sega Channel is a joint venture between Time Warner, Telecommunications Inc. (TCI), and Sega that will make a library of Sega titles available for download to the Genesis through most basic cable systems (you'll pay a premium for the service, prices have not been set). All you need is a special "tuner/ decoder" cartridge that tunes in the channel, pops up a menu, and downloads your choice. The channel will offer test drives of new games, but they'll be hobbled: You can only get to the third level, for example. If you want to get to the fourth, you have to buy the game.

"We have built this tremendously valuable asset with a huge installed base, so you try to figure out more ways to put it to work for you," says Doug Glen. "On an informal basis, we've found that the most powerful marketing technique is the rental and borrowing grapevine. The majority of gameplayers try a game before they buy it. Kids spend more time thinking about the next game they are going to buy than an adult spends before buying a car."

Sega also plans to use the channel as a means of dipping its toes into the untested waters of cable-based interactive services. "There are going to be so many services in the future that it will be confusing to the consumer," says President Tom Kalinske. To be sure, he admits, the Sega Channel "could be a major source of revenue for us." But he is cautious: "We want to make sure that we do this correctly. We'll learn a lot about how people want to interact with a service that is downloaded."

To learn the business of interactive services, Sega turned to AT&T; and PF Magic, a San Francisco-based multimedia development company. Due in summer 1994, The Edge 16 is a Genesis peripheral that captures a gamer's joystick movements and transmits them via phone lines to any similarly equipped Genesis machine. Think of it as ISDN meets Sonic the Hedgehog. The Edge will also allow voice connections, so gamers can hear each other yip and yowl as they compete.

The Edge is much more than a Sega modem. It includes four slots for "enhanced game play," double the onboard RAM of the Genesis, and "special ports for the addition of a keyboard, as well as future expansion upgrades," according to AT&T;'s press release. In other words, The Edge, which will retail for about US$150, is AT&T;'s bid for the home telecomputer market. And it's Sega, not Nintendo, that AT&T; is betting will take it there.

From Game Box to Highway On-ramp

"CD is the future of the business," says Peter Dille, director of marketing for Sony Imagesoft, a major producer of Sega CD titles. "It's the only game in town."

It was Sega of America that breathed life into the Sega CD, probably Sega's riskiest, and smartest, new platform to date. While the massive storage capabilities of CD-ROM allow the US$229 Sega CD to produce near-television- quality video and red-book audio, the Genesis to which it is connected can only throw so much data to the screen at any given time. First-generation games for the Sega CD, such as Sewer Shark or Night Trap, lacked the impulsive, real-time qualities that sold 4.5 million units of Sonic the Hedgehog 2 (at US$50 a pop - you do the math).

Nintendo knew this, and, as befits its conservative tradition, decided to stall its previously announced plans for a CD player (it still won't commit to CD, even for its recently announced Project Reality platform due in 1995). In equally typical fashion, Sega seized the initiative and brought its player to market in early 1992. Although the player has sold a modest 250,000 units, slow sales have been more than offset by the cachet the unit has brought to Sega's image.

"We looked at Sega's CD product and we said 'this is not very good,'" said George Harrison, director of marketing and corporate communications for Nintendo. "But when we talked to kids - who didn't know anything about it - they thought it was the world's greatest thing. It gave Sega a real halo."

Sega hopes to polish that halo with the next generation of recently released CD games, which include a 3-D version of Sonic the Hedgehog; a film noir, first-person boxing title called Prizefighter (Sega hired 200 extras to play the characters and audience); Ground Zero Texas, a US$3 million production replete with invading aliens and other B-movie regalia; and Switch (a working title), an interactive movie with name talent and a diabolically complicated plot (see On the Set, page 129).

And it doesn't stop there: Next year Sega plans to introduce a 32-bit CD- ROM-based machine code-named Saturn. Priced at around US$500, it will compare favorably to the 3DO multiplayer and, unlike 3DO, it will bring an installed base of 12-15 million Sega fanatics along for the ride. And you can bet it will talk to your cable TV service.

"Once kids start interacting with live video," asserts Tom Zito, president of Digital Pictures, which produced many of Sega's hit CD-ROM titles, "they'll never go back."

But whose live video? When it comes to interactive entertainment, Sega is not the only game in town. A stampede of companies, from Prodigy to Silicon Graphics, are lining up at the information highway feed trough, and while Sega is at the top of its field right now, at least two companies - 3DO and Nintendo - are poised to strike back immediately.

"I think it is still a horse race," says Judith Lange, executive vice president at Crystal Dynamics, a software company that released the first title for the 3DO machine. Lange, who once worked in sales at Sega, says her company will consider making software for Sega when Saturn ships next year.

In the meantime, 3DO has shipped its US$700 "multiplayer," although in quantities that Nintendo's Harrison finds unremarkable. "They plan to sell about the same number (of CD-ROMs) in a whole year as we sell Super Nintendo units in one weekend," he says. "We are more than happy to have someone pioneer a market, then fail; then we can step in."

Nintendo isn't sitting on its hands, Harrison says, but its Project Reality, a joint venture with Silicon Graphics that will bring 64-bit Nintendo to the masses in 1995, hasn't set the game world on fire. If Nintendo doesn't come up with something between now and then, it could see its already eroding market share washed away. Chances are that something new will be a CD player. A prototype, based on Sony technology, reportedly awaits a nod from Nintendo's conservative management.

Next to Nintendo or 3DO, Sega's toughest competitor may turn out to be Sega. In interactive entertainment, you're only as good as your software. Since Sega now makes 50 percent of its own software, it regularly competes with its own developers for market share, says Lee Isgur, a partner with Volpe Welty & Co. in San Francisco. Both Acclaim and Activision bid for the rights to produce Jurassic Park on Genesis, but they lost to Sega. "If a 3DO or an Atari Jaguar can legitimately establish itself, and they won't be a competitor (in terms of software), you could see third-party support shift to the new guy on the block," he says. "That's how Sega established itself against Nintendo."

Tom Zito says his company could have done a 3DO version of Prizefighter, but Sega would not allow it. "They considered Prizefighter to be a killer app, and they wanted it to be available only on their machine," he says. "The point is: 'If you want to play this game, you gotta buy Sega CD.' " Zito's Night Trap, one of the original interactive movies for Sega CD, is now available for 3DO.

So how will Sega stay on top in a fickle market where the next Sonic blockbuster could find itself playing on a competitor's machine? Diversity, says VP of development Joe Miller. With a cable channel, a billion-dollar arcade business, peripherals like the Edge and VR helmets, and an eighteen- month lead in the CD-ROM business, Sega plans to dominate the world's interactive entertainment industry by the sheer force of diversity.

"If someone told me years ago that they had an idea for a game based on a blue hedgehog, I am not so sure that I would be that excited," Miller says, putting a contextual spin on Sega's success. "If Disney had stopped with Mickey, it'd be a pretty dull place."

On the Set

Sega SIDEBAR Sega SIDEBAR Sega SIDEBAR Sega
Studio five on the Hollywood Center film lot is roughly the size of a high school gymnasium. For the filming of Switch (a working title), studio five has been transformed into a disjointed Egyptian mansion, built by an eclectic (and now dead) archaeologist. In the final Sega CD product, the game player attempts to outsmart the building's new tenants in a search for an ancient Egyptian treasure hidden somewhere in the structure.

With all the accoutrements of a major movie production - the scaffolding, the black curtains, the gophers and grips and extras tugging at elaborate costumes - it's hard to believe I am watching the creation of a video game. Each room in the "mansion" is rigged with byzantine traps that the game player must defuse, avoid, or fall victim to.

Deborah "Blondie" Harry, her size-six frame squeezed into a size-four Cleopatra-meets-the-diva dress, is smoking a cigarette and acting like a perfect star, pain-fully bored with all of this. Two more days and the shoot is over. Up ambles 16-year-old Corey Haim, of Lost Boys and Stand by Me fame. Haim just finished shooting a scene where he becomes a human pinball in an elaborate set of Egyptian columns. He plays the bad guy in this film, the one you must confront to win. Haim bums a light from Blondie and watches the crew prepare for the next shoot. Blondie may see shooting one of the first-ever interactive game movies as just another job, but Corey Haim hears the ever-strengthening heartbeat of a new promotional medium. For Haim, shooting Switch is a chance to be a Segastar. He's positively smitten with the possibilities.

"Sega is definitely where it's happening," Haim says, then drags on his Marlboro. "I mean, like I have some plans with this company."

"Plans?" I ask.

"Yeah, man. Like have you seen their ads? Far fuckin' out. I want to be in them. I want to be, like, the Sega boy."

Haim's eyes grow distant with the thought of starring in his very own Sega commercial. Forget the fact that his mug will be spinning on hundreds of thousands of Sega CDs across the land. To be the Sega boy - far fuckin' out.

Sega FACTS Sega FACTS Sega FACTS Sega

Size of US video game market: US$5.3 billion Size of US movie market: US$5 billion Size of US theme park market: US$6 billion Percentage of homes with boys age 8-16 with game machines: 80 Sega gross sales in 1989: US$813 million In 1993: US$3.6 billion Nintendo gross sales in 1989: US$2.7 billion In 1993: US$4.3 billion Disney gross sales in 1992: US$7.5 billion Number of Genesis systems installed in 1991: 1 million In 1993 (est.): 12 million Average price of a movie ticket: US$5 Average price of a videogame: US$50 Percentage of Sega employees in R&D;: 40 Number of Sega CD units sold by 9/93: 250,000 Number Sega expects to sell by 1/94: 1 million Average age of person playing Electronic Arts's Sega games: 20 Average age of person playing Electronic Arts's Nintendo games: 13 Size, in square feet, of Sega's 1986 booth at the Consumer Electronics Show: 1,800 In 1993: 39,000 Processor in Apple's original Macintosh computer: Motorola 68000 Processor in Sega's original Genesis machine: Motorola 68000 Sources: NPD Inc., Entertainment Data Inc., Sega, Alex Brown & Associates, Electronic Arts, Amusement Business, Disney, Nintendo