Console Wars (2015)





In October 1991 Minoru Arakawa was asked under oath if he considered the inventor of Sonic to be a “genius,” on par with the likes of Shigeru Miyamoto, who had created Mario, Zelda, and other classic games for Nintendo. Arakawa looked around the San Francisco courtroom and carefully considered the question, though there was a lot on his mind. This trial, for one thing, had become a nuisance.

The litigation between Nintendo and Tengen had been dragging on since 1988. After the infamous reverse-engineering incident, Nintendo had sent letters to retailers such as Toys “R” Us and Bradlees threatening legal action against anyone who continued to sell unauthorized NES-compatible game cartridges. Tengen responded by suing Nintendo for unfair competition and violations of section 2 of the Sherman Antitrust Act for the alleged monopolization of the videogame console market. Nintendo countered by bringing a suit against Tengen for patent infringement, breach of contract, and RICO violations. Beyond compensation for damages, Nintendo sought an injunction that required Tengen to remove its unlicensed games from stores. Though it had been three years and there was still no resolution, the litigation had effectively crippled Tengen.

The legal issues weren’t Arakawa’s only problem, however. They were annoying, yes, especially the corrosive manner in which they dragged on and on, but the more pressing matter was the Super Nintendo. It had been released on August 23, 1991, and, in only two months, Nintendo of America had already sold 500,000 systems. Though the numbers appeared to be strong, they were falling slightly below the initial forecasts. This angered Yamauchi, who had grown accustomed to expecting nothing but the best out of his son-in-law—especially following the frenzy that the Super Famicom had stirred in Japan.

There were two reasons the American launch had failed to replicate the excitement found in Japan. The first was an issue of public perception. Nintendo of America had known that the lack of backward compatibility would be a problem but hadn’t anticipated the scope of the backlash. Around the country, parents reacted as if they had just discovered that Nintendo was operating some kind of electronic Ponzi scheme. This outrage prompted a carousel of newspaper headlines like “Parents Say Nintendo Isn’t Playing Fair” (Kansas City Star), “Nintendo Game Plan Infuriates Parents” (Atlanta Journal), and “Parents Vow to Resist Onslaught of New, More Costly, Nintendo” (Patriot-News). Parents weren’t just upset by the compatibility issue but also irate that Nintendo didn’t sell a converter that could resolve the compatibility problem—especially when such a device was being sold by Sega, who presented the other major obstacle to Nintendo’s American launch.

For $35, Sega sold something called the Power Base Converter, which allowed games designed for their 8-bit Master System to work on their 16-bit Genesis. Even though very few people owned the Master System and the Power Base Converter was hard to find in stores, Sega flaunted the fact that such a device existed as proof that they cared more about their customers than Nintendo did. It quickly became Sega’s most valuable, if worst-selling, product.

The converter, however, was only the tip of the iceberg when it came to Sega, the much bigger problem was Sonic The Hedgehog. The character had been only a mild success in Japan for Sega’s Mega Drive but was an instantly adored phenomenon in America. It was as if after a decade of conservative politics under Presidents Ronald Reagan and George H. W. Bush, Sonic’s combination of speed, attitude, and energy seemed to embody the promise of the 1990s.

Although Minoru Arakawa would never admit it to Kalinske (he wouldn’t even meet with Sega’s president) nor ever voluntarily proclaim it in public, on the witness stand he had to tell the truth. “Yes,” he said. “They looked at Super Mario. They wanted to come up with something similar.” After answering, all he could do was sit there and wait for the next question. There would always be more, it seemed, because this battle with Tengen would never come to an end.

Later that month, Kalinske flew to New York City with Nilsen, Toyoda, and Burns. With the holiday season approaching, they all had a lot on their plates, but for the next few hours they would have only one thing on their minds: Tengen.

After touching down at JFK, the four of them hustled through the airport with their carry-ons, sneering at the suckers who had checked bags, and flagged down a heavily dented yellow cab. As Kalinske got into the passenger seat, his three employees took deep breaths and thought thin thoughts in order to fit into the backseat. “We need to go to the Coliseum in Columbus Circle,” Kalinske told the driver, before taking a mental photo of Nilsen, Toyoda, and Burns all crammed together. “And at the risk of sounding like a movie cliché or, worse, a tourist, feel free to step on it.”

“How are we doing on time?” Toyoda asked, out of breath.

“Bordering on screwed,” Burns replied.

“Nah, don’t worry about it,” Kalinske said in his breezy manner. “We’ll be fine. Besides, they won’t start without us.”

Nilsen looked out the window, his eyes taking in the towering buildings. “We’ve done all we can. Our fate is now in the hands of Trafficles,” Nilsen said. When the others didn’t seem to get it, he elaborated: “You know, the Greek god of gridlock.”

Kalinske, Toyoda, and Burns chuckled, which eased somewhat the anxiety they’d each been feeling. Nilsen had a real talent for detecting tension and knowing how (and when) to defuse it a little. It was a skill that had proved to be quite valuable at Sega over the past few months, when things had quickly gone from calmly good to chaotically great. By July, word of Sega had started spreading throughout the country, among consumers and business executives alike. By August, customers who had been holding out for the SNES started giving in to their 16-bit desires and purchasing a Genesis. And by September, retailers were experiencing periodic stockouts. To keep up with the increased demand, the company had to grow quickly—not just in terms of facilities and number of employees but also creatively and in the employees’ mind-set. More people, more press, more games—it would have been a nightmare, if it all weren’t so wonderful.

Proof of success could be found in the little things. The speed at which calls and faxes were returned. The respect, unspoken but visible on people’s faces, when you told someone that you worked at Sega. And the unexpected moments when you were in line at the supermarket or video store and some random kid was explaining to his parents how important it was that he get a Genesis for Christmas. All these things were more than just a pat on the back—they served as a push on the shoulder to keep Sega moving faster, faster, faster. Sega now had its foot in the door, but Nintendo still owned the house.

Kalinske was willing to try anything as long as it didn’t go against the Sega narrative that he was trying to sell to the world: fun, scrappy, edgy company revolts against the tyrannical status quo and brings entertainment to the next level. Naturally, the idea of jumping into bed with an enemy of Nintendo fit right into his mission. So he was not at all surprised when Toyoda came to him expressing a desire to work with Tengen.

At the behest of Nakayama, Toyoda had been testing the waters with Tengen’s CEO, Dan Van Elderen. On the surface, a relationship between Sega and Tengen made a lot of sense. Sega needed more games, and Tengen could provide great titles. Below the surface, a relationship between both companies made even more sense. What the public didn’t know, and what Kalinske had just found out, was that Nakayama had been helping out Tengen behind the scenes for years. In an effort to weaken Nintendo, he had offered financial resources to help foot their mounting legal bills. Kalinske wanted to know how long this had been going on. He also suspected that Sega might have even been the reason that Tengen had reverse-engineered the NES in the first place, but he knew he’d never find out for sure. Getting straight answers out of Nakayama was like catching a shadow and pulling its teeth with a needle from a haystack. Kalinske respected his boss greatly but hated the fact that he’d been at Sega for a year now and still felt like there were secrets hidden behind every door. Still, there was no use fixating on something he couldn’t control. And even with the occasional corporate surprise, Nakayama had been true to his word, granting Kalinske the autonomy to run Sega of America as he saw fit. Besides, in this case Nakayama’s penchant for chicanery had worked out to his advantage, as Sega had signed a very favorable deal with Tengen.

As New York whizzed by outside the windows of their cab, Kalinske, Nilsen, Toyoda, and Burns scrambled through files and folders to review talking points for today’s joint press conference with Tengen.

“Which sounds bigger?” Burns posed. “ ‘Tengen will be making forty games for Sega over the next two years’ or ‘Tengen will be making twenty games per year for the next two years’? Forget it, that sounds redundant.”

“Territory question,” Kalinske put in, flipping through a folder. “Nothing in the language with regard to Asia, right?”

“That is correct,” Toyoda said, not needing to consult any notes. He knew this deal through and through. “It applies only to America and Europe.”

“If you feel the need to mention a title off the cuff,” Nilsen said, scanning a partial list of Tengen’s games. “I would go with the R.B.I. Baseball series. The Pac-Man stuff is great, but I think it’ll come off as old hat with this crowd.”

Kalinske nodded, now reviewing his speech. Even though it would be short and sweet, the text was sharp, witty, and well put together. Kalinske had gotten help from Ellen Beth Van Buskirk, who’d been lending a hand to PR endeavors and would be staying with Sega after the mall tour to run communications inside the company. The mall tour was almost done, and the results showed that bringing her into the fold was a no-brainer. The Sega World Tour had already reached over 100,000 people (with 63 percent of that audience being children and teenagers). Of that total, 88 percent chose the Genesis over Super Nintendo. In addition to the staggering results of Sega’s “taste test,” articles about the showdown in major national and regional newspapers were on pace to reach ten million people. Van Buskirk was most definitely a keeper. With a small smile on his face, Kalinske reread the opening to the speech she had helped write and nodded to himself. “She’s real good.”

“Who?” Toyoda asked, always alert.

“Ellen Beth,” Nilsen said, knowing exactly whom Kalinske meant. “EBVB.” Nilsen had immediately recognized that she was a star from how cleverly she had brought his vision for the Sega World Tour to life to the way she could speak at length to anyone, from any walk of life, and never sound like she was talking up or talking down to them. “She was incredible at the malls,” Nilsen said. “She just gets it. She really does.”

“She’s making a dent,” Kalinske said. “Next time we should bring her along.”

“Definitely,” Burns echoed. “That is, you know, if she isn’t busy hobnobbing with the world’s greatest athletes.”

The others laughed. EB had done such a bang-up job in her first couple of months at Sega that SOJ had entrusted her with an important assignment, or at least something they considered to be a top priority. With SOA making a name for itself, some of the folks at SOJ decided to play a game of anything-you-can-do-we-can-do-better. So they stepped into SOA’s sandbox and searched for a splashy marketing opportunity. As lovers of golf, they looked into sponsoring an event on the PGA tour. But that turned out to be pricy and difficult to procure. Instead, they decided to sponsor an LPGA event in Atlanta. When Kalinske found out, he thought it was a prank. Beyond the LPGA’s lack of popularity among the general public, Sega wasn’t even selling a golf game, let alone a women’s golf game. But before he or anyone else at SOA could intervene, it was already done. And EB, a former athlete who had demonstrated an ability to pull off unusual events, was put in charge of this one. The first annual Sega Women’s Championship would tee off on April 19, 1992.

“Jeez,” Kalinske said. “I sure hope a good excuse to skip that LPGA event crops up between now and then.”

After a nod of camaraderie, they returned to their last-minute homework for the press conference. Kalinske would be the only one of them speaking, but he wanted everyone to do as many press interviews as possible. So they all pored through the information they had on hand and made sure they had a few quotes ready.

They made it to the Coliseum on time, and it was a good thing they did. The lavishly decorated room was filled with a large crowd of journalists, financial analysts, and potential investors (Tengen was rumored to be seeking a round of additional capital). The event was kicked off by the two men that Toyoda had been negotiating with: Dan Van Elderen, Tengen’s tall CEO, and Ted Hoff, their bespectacled executive vice president of sales and marketing. After they proudly announced a strategic alliance with Sega to produce forty games, Kalinske came to the podium and uncorked a bottle of his steely enthusiasm. The content of the speeches that day was secondary to the visual of Nintendo’s rivals shaking hands, though Kalinske made waves with his bold claim that Sega was already outselling Nintendo. Whether this was true or not was a matter of debate, but it foreshadowed a contentious game of numbers that Sega and Nintendo would play over the next few years.

Following a series of photo ops and press interviews, Kalinske and company went out for a round of celebratory drinks with Van Elderen and Hoff. The Tengen guys were a lot of fun, and it was nice to clink glasses and speak in the buzzed, conspiracy-laden hush of new friends with big, bold plans. Nintendo was in the crosshairs, they decided, and would finally get what was coming to them.

“How’s the never-ending trial going?” Kalinske asked, sipping a beer.

“I’d be more than happy to bitch about it,” Van Elderen said with a grumble. “But unfortunately we’re not allowed to discuss the proceedings. I will say, however, that it was funny to see Arakawa have to share his thoughts about Sonic under oath.”

After a gurgle of laughter, Kalinske checked his watch and announced that he had to step out for a few hours.

“You have a date?” Hoff asked.

Kalinske nodded to his guys, who knew where he was headed. “A big one,” he told Hoff, and then said his goodbyes. Before leaving New York, Kalinske had another one of Nintendo’s enemies to meet with, someone with a little more muscle than Tengen: Sony.

A few months earlier, Kalinske had received a call from Olaf Olafsson, who was at Sony’s Imagesoft offices in Santa Monica. Olafsson had wanted to meet Kalinske, and with the feeling being mutual, they agreed to get together for lunch. They bonded over their outsider status in the videogame world, as well as a mutual love for honesty, innovation, and unconventional ideas. Thanks to their similar personalities, it was quickly evident that they were destined to be friends. The only question that remained was whether or not they would also be business partners. Olafsson offered Kalinske a standing invitation to meet with him and his boss, Mickey Schulhof, the next time he was in New York—which turned out to be for the Tengen press conference.

The three of them decided to meet for dinner at the private club atop the Sony offices at 55th and Madison. Kalinske entered the white-facaded building and took the elevator all the way up to the thirty-seventh floor, where Olafsson and Schulhof were waiting for him. “Right on time,” Olafsson said, flashing a half smile. “Tom, meet Mickey Schulhof; and Mickey, say hi and be kind to my friend, the incomparable Mr. Kalinske.”

“A pleasure,” Schulhof said, extending a hand. He was a handsome man with perfectly parted hair, a tan, and a bright white smile. Though his soft handshake might have suggested that he was another of the dime-a-dozen pampered executives, he glowed with a gritty, omnipotent confidence. “I’ve heard way too many great things about you from Olaf, so I already know they can’t all be true.”

“I like it when the bar is set high,” Kalinske replied. “Otherwise, what’s the point?”

Kalinske, Olafsson, and Schulhof were seated by a window overlooking the city, where they enjoyed an elegant seafood meal with a fine chardonnay. They started off the evening by sharing rehearsed chapters from their individual life stories, and eventually progressed to sharing impromptu anecdotes from their travels around the world. Somewhere between five and ten bites into their main course, though, the conversation shifted to business matters. “So,” Schulhof began, “Olaf tells me that you plan to turn the videogame industry on its head.”

“That’s the plan,” Kalinske said with a smirk.

“Excellent,” Schulhof said. “That’s what I like to hear.”

“The fact is, we strongly believe in the business,” Olafsson clarified. “The games themselves, I could take or leave. But the industry as a whole—there will be a gold rush.”

“In many ways,” Kalinske said, “it has already begun.”

“True, true,” Olafsson said, nodding. “Perhaps my vantage point is a bit affected by Sony’s angle on all of this.”

Kalinske leaned back in his chair to get a better look at both of his hosts. “So tell me, then, what is the ideal scenario for Sony?”

Schulhof gladly fielded the question. “When I first began at Sony in the late seventies, we made our bones selling televisions and stereos. We did quite well. Well enough that it would have been easy to stick our heads in the sand and keep cashing paychecks for the foreseeable future. If it ain’t broke, don’t fix it, right?”

The three used the rhetorical pause to take a long sip from their wineglasses. After a satisfied sigh, Schulhof continued, “But then in 1978 an audio engineer named Nobutoshi Kihara invented a small, portable stereo that allowed people to listen to music anywhere they went. Many questioned this logic and wondered why anybody in their right mind would possibly want to enjoy music outside the living room. Sony, however, didn’t bat an eyelash, and moved full steam ahead with this device called the Walkman. Without any need to take the risk, we pushed all of our chips to the middle and changed the way that music is enjoyed around the world.”

“I remember getting my first Walkman,” Kalinske said nostalgically.

“Of course you do,” Schulhof said. “Because if Sony does something, we do it memorably. The whole nine yards, or nothing at all.”

Olafsson smiled. “I believe the popular parlance is ‘Go big or go home.’ ”

“It’s true,” Schulhof said. “Columbia Pictures. Compact discs. CBS Records.”

“You don’t need to paint me a résumé,” Kalinske said. “I’m already thoroughly impressed. But I’d like to know where Sega fits into all of this. Is Sony looking to make an acquisition?”

“Not at all,” Schulhof said, shaking his head. “I truly believe in synergy. Not the bullshit buzzword version of the term, but the real-life implications of finding situations of mutual benefit.”

Olafsson elaborated. “Sega has the experience and is gaining the credibility. Sony has the tech and financial resources. But what we share is the intelligence to realize that multimedia is the inevitable future of entertainment. On that note, is it safe for me to assume that Sega has some kind of CD-based gaming system in the works?”

Kalinske considered a vague response but decided to reveal his hand. If there was any chance of building something with Sony, he couldn’t start with smoke and mirrors. “Yes, that’s accurate,” he said. “Sega is planning a CD attachment to Genesis.”

“How far along is it?” Olafsson asked.

“Nearing the end,” Kalinske said. “We want to go to market in late ’92.”

“Sega will beat the drum about this at CES in Vegas?”

“That’s a fair assumption.”

Olafsson pursed his lips, calculating the ramifications. “Good, that’s exactly what Sega ought to be doing,” he said. “And now that we know hardware needs are off the table, then any convergence between ourselves would be focused on software.”

“I hear that’s where the money is anyway,” Schulhof chimed in.

Olafsson subtly nodded to himself. “Is it also safe for me to assume that with the Genesis surging and all hands on deck to support the system, there is an increased need for outside parties to provide Sega with CD-based software?”

“Definitely,” Kalinske said. “I won’t even consider bringing a CD add-on to America until we have the right software in place.”

Olafsson looked at Schulhof, hinting that there was potentially something here. They paused again for a bite or two of their delicious seafood dinner before Olafsson spoke up once more. “We’re obviously not at a place to jump into anything of substance here,” he said. “But we have no reservations saying that we like you, and I believe that feeling is mutual.”

Kalinske nodded; it certainly was.

“So we’re two teens in love,” Olafsson mused, “ready to offer the world to each other, but any consummation would require parental approval.”

“And Japanese parents have a reputation for being strict,” Kalinske added.

“Tell me about it,” Schulhof murmured, shaking his head.

“Nevertheless,” Olafsson concluded, “with some massaging, I think that there very well could be a way for Sony to help supply Sega’s software needs.”

“I’ll work on things from my end,” Kalinske commented.

“And we’ll do the same,” Schulhof replied.

“Fantastic, then,” Olafsson said. “But I would like to note, in the spirit of complete and utter honesty, that a working relationship would likely not preclude the possibility of Sony one day looking to get into the console business.”

Kalinske shrugged. “I wouldn’t expect it any other way. But for now, I think we both have a lot to gain by holding hands. Down the road? Maybe that’s something we explore together, or maybe we go our separate ways. But I’m okay with that ‘maybe.’ ”

“Us too,” Schulhof said.

“Good,” Kalinske said, and raised his glass, prompting Olafsson and Schulhof to do the same. “To ‘maybe,’ and all the wonderful possibilities that the word may create.”