Development In the early 1980s,
Sega Enterprises, Inc. – then a subsidiary of
Gulf+Western – was one of the top five
arcade game manufacturers active in the United States, as company revenues surpassed $200 million between July 1981 and June 1982. A downturn in the arcade business starting in 1982 seriously hurt the company, leading Gulf+Western to sell its North American arcade manufacturing organization and the licensing rights for its arcade games to
Bally Manufacturing. The company retained Sega's North American R&D operation, as well as its Japanese subsidiary, Sega Enterprises, Ltd. With its arcade business in decline, Sega Enterprises, Ltd. president
Hayao Nakayama advocated that the company leverage its hardware expertise to move into the home console market in Japan, which was in its infancy at the time. Nakayama received permission to proceed with this project, leading to the release of Sega's first home video game system, the
SG-1000, in July 1983. The SG-1000 was replaced by the
Sega Mark III within two years. In the meantime, Gulf+Western began to divest itself of its non-core businesses after the death of company founder
Charles Bluhdorn, so Nakayama and former Sega CEO
David Rosen arranged a
management buyout of the Japanese subsidiary in 1984 with financial backing from
CSK Corporation, a prominent Japanese software company. Nakayama was then installed as CEO of Sega Enterprises, Ltd. In 1986, Sega redesigned the Mark III for release in North America as the Master System. This was followed by a European release the next year. Although the Master System was a success in Europe, and later in Brazil, it failed to ignite significant interest in the Japanese or North American markets, which, by the mid-to-late 1980s, were both dominated by Nintendo. With Sega continuing to have difficulty penetrating the home market, Sega's console R&D team, led by Masami Ishikawa and supervised by Hideki Sato, began work on a successor to the Master System almost immediately after that console launched. In 1987, Sega faced another threat to its console business when Japanese computer giant
NEC released the
PC Engine amid great publicity. To remain competitive against the two more established consumer electronics companies, Ishikawa and his team decided they needed to incorporate a
16-bit microprocessor into their new system to make an impact in the marketplace and once again turned to Sega's strengths in the arcade industry to adapt the successful
Sega System 16 arcade board into architecture for a home console. According to Sato, the Japanese design for the Mega Drive was based on the appearance of an audio player, with "16-bit" embossed in a golden metallic veneer to create an impression of power. Sega announced the console as the Mark V in the June 1988 issue of the Japanese gaming magazine
Beep!, but Sega management wanted a stronger name. After reviewing more than 300 proposals, they settled on "Mega Drive". In North America, the name was changed to "Genesis". Sato said some design elements changed, such as the gold "16-bit" wording, in case it was mistaken for yellow. He believed the changes represented different Japanese and American cultural values. though the launch was overshadowed by Nintendo's release of
Super Mario Bros. 3 a week earlier. Positive coverage from magazines
Famitsu and
Beep! helped to establish a following. However, Sega only managed to ship 400,000 units in the first year. In order to increase sales, Sega released various peripherals and games, including an online banking system and
answering machine called the Sega Mega Anser. and remained a distant third in Japan behind Nintendo's
Super Famicom and NEC's PC Engine throughout the 16-bit era. At the time, Sega did not possess a North American sales and marketing organization and was distributing its Master System through
Tonka. Dissatisfied with Tonka's performance, Sega looked for a new partner to market the Genesis in North America and offered the rights to
Atari Corporation, which did not yet have a 16-bit system. David Rosen made the proposal to Atari CEO
Jack Tramiel and the president of Atari's Entertainment Electronics Division, Michael Katz. Tramiel declined to acquire the new console, deeming it too expensive, and instead opted to focus on the
Atari ST. Sega decided to launch the console through its own Sega of America subsidiary. It officially launched in September 1989, though a handful of units reached retailer shelves in New York and Los Angeles in late August. The European version of the Mega Drive was released in September 1990, at a price of , i.e. . The release was handled by
Virgin Mastertronic, which was later purchased by Sega in 1991 and became Sega of Europe. Games like
Space Harrier II, ''
Ghouls 'n Ghosts, Golden Axe'', Between July and August 1990, Virgin initially placed their order for 20,000 Mega Drive units. However, the company increased the order by 10,000 units when advanced orders had exceeded expectations, and another 10,000 units was later added following the console's success at the ECES event. The projected number of units to be sold between September and December 1990 had eventually increased to 40,000 units in the United Kingdom alone. Other companies assisted in distributing the console to various countries worldwide.
Ozisoft handled the Mega Drive's launch and marketing in Australia, as it had done before with the Master System. In Brazil, the Mega Drive was released by
Tectoy in 1990, only a year after the Brazilian release of the Master System. Tectoy produced games exclusively for the Brazilian market and brought the
Sega Meganet online service there in 1995.
Samsung handled sales and distribution in
Korea, where it was named Super Gam*Boy and retained the Mega Drive logo alongside the Samsung name. It was later renamed Super Aladdin Boy. In India, Sega entered a distribution deal with
Shaw Wallace in April 1994 in order to circumvent an 80% import tariff, with each unit selling for
INR₹18,000. In Russia, Sega officially licensed the console to local distributor Forrus in 1994, replaced in 1996 by Bitman. That year, the video game console market generated between and in Russia, with Sega accounting for half of all console sales in the country. However, only about 15% of the sales were official Sega units distributed by Bitman, while the rest were unofficial counterfeit clones.
North American sales and marketing For the North American market, former Atari Corporation Entertainment Electronics Division president and new Sega of America CEO Michael Katz instituted a two-part approach to build sales. The first part involved a marketing campaign to challenge Nintendo head-on and emphasize the more arcade-like experience available on the Genesis, with slogans including "Genesis does what Nintendon't". Nonetheless, Sega struggled to overcome Nintendo's presence in consumers' homes. Tasked by Nakayama to sell one million units within the first year, Katz and Sega of America sold only 500,000. In mid-1990, Nakayama hired
Tom Kalinske to replace Katz as CEO of Sega of America. Although Kalinske knew little about the video game market, he surrounded himself with industry-savvy advisors. A believer in the
razor and blades model, he developed a four-point plan: cut the price of the console, create an American team to develop games targeted at the American market, expand the aggressive advertising campaigns, and replace the bundled game
Altered Beast with a new game,
Sonic the Hedgehog. but all four points were approved by Nakayama, who told Kalinske, "I hired you to make the decisions for Europe and the Americas, so go ahead and do it." In large part due to the popularity of
Sonic the Hedgehog, the Genesis outsold the SNES in the United States nearly two to one during the 1991 holiday season. Sega controlled 65% of the
16-bit console market in January 1992, the first time Nintendo had not been the console leader since 1985. The Genesis outsold the SNES for four consecutive Christmas seasons due to its two-year lead, lower price point, and larger game library compared to the SNES at its release. Sega had ten games for every game on SNES, and while the SNES had an exclusive version of
Final Fight, one of Sega's internal development teams created
Streets of Rage, which had bigger levels, tougher enemies, and a well-regarded soundtrack. Sega's advertising positioned the Genesis as the cooler console, With the Genesis often outselling the SNES at a ratio of 2:1, Nintendo and Sega focused heavily on
impression management of the market, even going to the point of deception; Nintendo claimed it had sold more consoles in 1991 than it actually had, and forecasted it would sell 6 million consoles by the end of 1992, while its actual U.S. install base at the end of 1992 was only just more than 4 million units. Due to these tactics, it was difficult to ascertain a clear leader in market share for several years at a time, with Nintendo's dollar share of the U.S. 16-bit market dipping down from 60% at the end of 1992 to 37% at the end of 1993, Sega claiming 55% of all 16-bit hardware sales during 1994, and
Donkey Kong Country helping the SNES to outsell the Genesis from 1995 through 1997. According to a 2004 study of
NPD sales data, the Genesis maintained its lead over the Super NES in the American 16-bit console market. However, according to a 2014
Wedbush Securities report based on revised NPD sales data, the SNES outsold the Sega Genesis in the U.S. market by units.
Electronic Arts To compete with Nintendo, Sega was more open to new types of games, but still tightly controlled the approval process for third-party games and charged high prices for cartridge manufacturing. The American publisher
Electronic Arts (EA) sought a better deal, but met resistance from Sega. They decided to
reverse-engineer the Genesis, using a
clean-room method similar to the method
Phoenix Technologies had used to reverse-engineer the
IBM Personal Computer BIOS around 1984. They created a controlled room in EA headquarters nicknamed "Chernobyl", to which only one person was allowed access, Mike Schwartz. Schwartz reviewed Sega's copyrighted development manuals and tools, studied the Genesis hardware and games, and wrote original documentation that summarized his findings. The process took him about a month. After a few months, EA began developing for the Genesis in earnest. The gameplay of
Sonic the Hedgehog originated with a
tech demo created by
Yuji Naka, who had developed a prototype platform game that involved a fast-moving character rolling in a ball through a long winding tube. This concept was developed with Ohshima's character design and levels conceived by designer
Hirokazu Yasuhara. Although Katz and Sega of America's marketing experts disliked
Sonic, certain that it would not catch on with American children, Kalinske's strategy to place
Sonic the Hedgehog as the pack-in game paid off.
Sonic the Hedgehog greatly increased the popularity of the Genesis in North America, and the bundle is credited with helping Sega gain 65% of the market share against Nintendo. where the Mega Drive maintained its lead over the SNES through 1994.
Sonic the Hedgehog 2 set records for the fastest-selling game, selling copies worldwide within two weeks, and
Sonic the Hedgehog 3 and
Sonic & Knuckles sold a combined copies worldwide.
Trademark Security System and Sega v. Accolade After the release of the Genesis in 1989, video game publisher
Accolade began exploring options to release some of their
PC games on the console. At the time, Sega had a licensing deal in place for
third-party developers that increased the costs to the developer. According to Accolade co-founder
Alan Miller, "One pays them between $10 and $15 per cartridge on top of the real hardware manufacturing costs, so it about doubles the cost of goods to the independent publisher." To get around licensing, Accolade chose to seek an alternative way to bring their games to the Genesis. It did so by purchasing one in order to
decompile the
executable code of three Genesis games. Such information was used to program their new Genesis cartridges in a way that would allow them to disable the security lockouts on the Genesis that prevented unlicensed games from being played. This strategy was used successfully to bring
Ishido: The Way of Stones to the Genesis in 1990. To do so, Accolade had copied Sega's copyrighted game code multiple times in order to reverse engineer the software of Sega's licensed Genesis games. As a result of piracy in some countries and unlicensed development issues, Sega incorporated a technical protection mechanism into a new edition of the Genesis released in 1991, referred to as the Genesis III. This new variation of the Genesis included a code known as the Trademark Security System (TMSS), which, when a game cartridge was inserted, would check for the presence of the
string "SEGA" at a particular point in the memory contained in the cartridge. If the string was present, the console would run the game, and would briefly display the message: "" Although the district court initially ruled for Sega and issued an injunction preventing Accolade from continuing to reverse engineer the Genesis, Accolade appealed the verdict to the
United States Court of Appeals for the Ninth Circuit. As a result of the appeal, the Ninth Circuit overturned the district court's verdict and ruled that Accolade's decompilation of the Sega software constituted fair use. The court's written opinion followed on October 20, 1992, and noted that the use of the software was non-exploitative, although commercial. Further, the court found that the trademark infringement, being required by the TMSS for a Genesis game to run on the system, had been inadvertently triggered by a fair use act and was the fault of Sega for having caused false labeling. The terms of the licensing, including whether or not any special arrangements or discounts were made to Accolade, were not released to the public. The financial terms of the settlement were also not disclosed, although both companies agreed to pay their own legal costs.
Congressional hearings on video game violence In 1993, the American media began to focus on the mature content of certain video games. Games such as
Night Trap for the
Sega CD, an
add-on, received unprecedented scrutiny. Issues about
Night Trap were brought up in the
United Kingdom, with former Sega of Europe development director Mike Brogan noting that "
Night Trap got Sega an awful lot of publicity ... it was also cited in
UK Parliament for being
classified as '15' due to its use of real actors." This came at a time when Sega was capitalizing on its image as an edgy company with attitude, and this only reinforced that image. Meanwhile, the tamer SNES version shipped without a rating. while Nintendo was criticized for censoring the SNES version. After the close of these hearings, video game manufacturers came together to establish the rating system that Lieberman had called for. Initially, Sega proposed the universal adoption of its system, but after objections by Nintendo and others, Sega took a role in forming a new one. This became the
Entertainment Software Rating Board, an independent organization that received praise from Lieberman. and 800,000 32X units. Following the launch of the next-generation 32-bit Sony
PlayStation and
Sega Saturn, sales of 16-bit hardware and software continued to account for 64% of the video game market in 1995. Nakayama's decision to focus on the Saturn, based on the systems' relative performance in Japan, has been cited as the major contributing factor in this miscalculation. Following tensions with Sega Enterprises, Ltd. over its focus on the Saturn, Kalinske, who oversaw the rise of the Genesis in 1991, lost interest in the business and resigned in mid-1996. Sega sold 30.75 million Genesis units worldwide. Of these, 3.58 million were sold in Japan, and 18–18.5 million as of June 1997 (at which time Sega was no longer manufacturing the system) respectively. In 1998, Sega licensed the Genesis to
Majesco Entertainment to rerelease it in North America. Majesco began reselling millions of unsold cartridges at a budget price, together with 150,000 units of the second model of the Genesis. It released the Genesis 3, projecting to sell 1.5 million units of the console by the end of 1998. However, some sources claim that the console sold 40 million units during its lengthy lifespan without specifying whether third-party variants are being considered. ==Technical specifications==