Console Wars (2015)

PART THREE

THE NEXT LEVEL

37.

THE SEGA-SONY-NINTENDO
LOVE TRIANGLE

There he was, Tom Kalinske. Such a difficult man to pin down. Social butterfly, man of the people, and king of the chameleons. It seemed that he was always vanishing in plain sight, but there he was now, alive and in the flesh. “Tom,” Olaf Olafsson said, tapping his target on the shoulder, “I’ve been looking for you.”

“Funny,” Kalinske said, “because I’ve been looking for you.”

“Sure, sure,” Olafsson said.

“Don’t sure-sure me,” Kalinske said. “I mean it! I’ve been around this room twice and am starting to suspect that the only way I could have missed you both times would be if you had been following right behind me.”

Olafsson chuckled quietly. “Your sense of humor always kills me,” he said. “Every single time. But enough of that for now. Fate has brought us together, and we have important matters that must be discussed.”

The two of them casually gravitated toward an empty corner of the room. They’d spoken a bit earlier, while doing that whole smile-for-the-cameras thing, but this would be their first chance to actually speak with candor.

“What’s on your mind?” Olafsson asked.

“Probably the same thing that’s on yours,” Kalinske said with a hint of frustration. “Newspaper articles hailing the wonderful relationship between Sony and Nintendo.”

“It’s complicated,” Olafsson said, with the same level of annoyance.

After Nintendo had snubbed Sony for Philips back in 1991, it was generally assumed that this signified the end of any relationship between the two Japanese powerhouses. And for a time that was true, but four months later, at the Tokyo International Electronics Show in October 1991, Sony unveiled its PlayStation. Unlike the consoles that Sega and Nintendo were selling, the PlayStation aimed to deliver something more than just games: sophisticated educational products, like Compton’s Encyclopedia, Microsoft Bookshelf, and National Geographic’s Mammals of the World. To those previewing the console, these impressive interactive titles proved that the PlayStation was indeed capable of “more than just games.” But because Sony didn’t have a single game on display, this raised a question: where were all the games? Or, even if the games weren’t ready to show off, where were they going to come from? The educational titles were impressive, but they had all clearly been licensed from other companies (Compton’s, Microsoft, National Geographic, etc.), and without great original games, the PlayStation was just a computer in disguise.

This was Sony’s fundamental problem. In the land of the console, content is king, and this realization led Sony back into Nintendo’s arms. With fences somewhat mended, Sony returned to the negotiating table, but quickly found Nintendo to be as stubborn as ever. The only deal that Nintendo was willing to accept would allow them to control the CD system’s software production with the same unforgiving authority they exerted over the cartridge business (limited quantities, strict licensing, lockout chips). Nintendo could afford to make enemies with such policies, but Sony was just getting its feet wet and didn’t want to alienate the industry. Additionally, Sony would essentially be beholden to their supposed partner in every possible way, from the creative (Nintendo could control which games were made and when) to the financial (Nintendo would collect a majority of the licensing fees). If agreed upon, this relationship wouldn’t be all that different from the master/slave dynamic that Olafsson had recounted earlier. Yet knowing all this, Sony’s directors were still interested enough to consider moving forward, and the reason they felt this way had less to do with videogames and more to do with videotapes.

In October 1969, Sony had unveiled a prototype for the world’s first videocassette recorder (VCR), which they dubbed the U-matic. Previously, video had been captured on film reels, which presented a number of challenges (like loading, playback, and duration), but the U-matic offered an all-in-one solution to make recording easy. And most important to a company like Sony, it presented a new consumer electronics category that would empower the masses with the power of recording video. Believing that this notion of videotapes would soon take the world by storm (and, in turn, spawn imitators), Sony approached JVC, Matsushita, and a handful of other top-tier electronic companies to sign a cross-licensing agreement and help establish unified technological standards. Although this agreement basically gave Sony’s enemies a blueprint for how to build their own weapons, it ensured that Sony would at least receive a small royalty for every shot fired (and also temporarily deprived competitors of any incentive to create more powerful ammunition, as peace would be more profitable than war). Not long after that, Sony finished development of the device and launched the U-matic in September 1971. The new device was critically praised as being the unquestioned future of recording, but that future was currently too expensive for the present. With a price tag of $1,300, the U-matic failed to interest the consumer market, but it did quickly become the standard for television production and business communication. Although this was not the demographic that Sony initially planned to target, the business was highly lucrative, and they were more than willing to service a professional clientele until the time came when the technology became more affordable.

That moment arrived in September 1974, when Sony was preparing to manufacture a more consumer-friendly videotape format dubbed Betamax, which was basically a smaller, cheaper, and easier-to-use version of the U-matic system. Sony once again met with the top-tier electronics companies to negotiate another cross-licensing agreement, but this time their competitors were less receptive to working together. Although JVC, Matsushita, and RCA each cited a limited recording time (only one hour) as their reason for resistance, a more accurate explanation might be that they did not want to become further beholden to Sony. With the U-matic, Sony had approached its competitors with a humble let’s-work-together mentality, but with the Betamax, Sony had adopted more of a take-it-or-leave-it attitude, which was made clear by higher licensing fees and little interest in working together to establish unified technological standards. Sony was surprised by the industry’s reluctance to adopt the new format, but assumed it was only a matter of time before this became the worldwide standard, and the Betamax was introduced to market in April 1975. Initial sales were incredibly strong, as Sony enjoyed 100 percent of this market it had just created, but behind the scenes forces were at work to beat Sony at their own game.

Throughout 1975, JVC’s engineers worked to develop a different consumer-friendly video format, which they named the Video Home System (VHS). In September of that year, a VHS prototype was completed and JVC quickly and quietly began to meet with other electronics companies and pitch their alternative to Sony’s Betamax. The VHS resembled the Betamax in many ways, but there were two notable distinctions: the VHS recorded at a lower quality than the Betamax, which enabled longer recording times, and the VHS cost $100 less to license than the Betamax. By touting these differences and wisely reincarnating Sony’s lost let’s-work-together mentality, JVC persuaded Matsushita, Hitachi, and Mitsubishi to adopt their format, and the VHS was launched in October 1976. With strong allies, longer recording times, and a cheaper price point, the VHS quickly gave the Betamax a run for its money.

Although Sony was initially caught off guard by these developments, they responded in March 1977 with the release of a new and improved Betamax videotape. This new model could record for up to two hours, but in Sony’s effort to rush this product to market, they made the mistake of not allowing for backward compatibility. Sony’s original Betamax tapes didn’t work on their new VCR, which alienated most of their initial customer base. This fatal flaw, along with a series of impressive maneuvers from JVC (like well-timed price drops and savvy European expansion), set the course for a slow, painful, and very expensive death for Sony’s Betamax. By 1979, Betamax held only 40 percent of the market; by 1984 that number had fallen to 20 percent; and by 1988 Sony had officially thrown in the towel and started to produce VHS VCRs.

Several years had passed since the so-called videotape format war had reached a cease-fire, but Sony’s scars could still be seen in every aspect of the company’s play-it-safe demeanor. With videogames, Sony could not afford to make the same mistake it had made with VCRs, and the best way to avoid that fate was to join forces with a powerful company whose support of a certain format could stave off extinction. And there was only one company that could provide that insurance: Nintendo. Or, more accurately, that was the case when Sony initially considered entering the videogame industry, but then Sega began its ascent, and with each passing month the Nintendo-centric worldview blurred further. Through Olafsson’s persistence, Sony now acknowledged Sega’s growing presence and was willing to work with them on software, but when it came to hardware Sony still did not view Sega as a worthy suitor. Not yet, at least.

Until that perception changed, Sony’s board of directors had adopted something of a Nintendo-or-bust attitude, and once again it was a Consumer Electronics Show that veered them toward bust. This time there was no public embarrassment, just a lot of private hand-wringing as negotiations reached a fever point. Both Sony and Nintendo had wanted to finalize a deal prior to the 1992 summer CES; not only was it the perfect venue for such an announcement, but there was a certain poetry to writing a happy ending at what had once been the scene of the crime. Days prior to the show it appeared the two companies were on the brink of an agreement (getting to the point where Nintendo’s PR firm, Hill & Knowlton, had even prepared a celebratory press release), but eleventh-hour disagreements between the parties killed the deal. So instead of marrying Sony, Nintendo renewed its vows with Philips, and the Sony-Nintendo negotiations were indefinitely put on hold. Perhaps this was due to irreconcilable differences, but more likely it was a case of cold or even frozen feet on Sony’s part. Despite all the back-and-forth, Sony still wasn’t sure if the videogame industry was worth the gamble.

But that all changed at the pivotal management meeting on June 24, 1992.

After Sony’s board of directors had made it clear that they had little interest in moving forward, Ken Kutaragi stunned them by revealing the console he had been secretly working on for months. In early 1992, he internally recruited the engineers behind Sony’s System G (a special-effects engine that retailed for $250,000), and persuaded them to help him build a new and improved system capable of rendering 3-D graphics. By this point, he already had a basic design concept, although it was still in the architecture stage. Nevertheless, he believed it was vastly superior to anything out there, as well as to anything in Sega’s and Nintendo’s pipeline, and this was what he proudly presented to the executives on hand. This was the moment he had been waiting for.

Unfortunately, Sony’s directors still weren’t fully convinced. Like before, with the Super Famicom audio chip, they fixated on the defiance and not the brilliance. Luckily for Kutaragi, also like before, Ohga was there to protect him. During that meeting he quizzed Kutaragi on the capabilities of this proposed console and how such a product would fit into the overarching Sony brand. Kutaragi adeptly answered all of Ohga’s questions and did so with a bravado that many in the room interpreted as arrogance. When the young engineer finished presenting his creation, Sony’s chairman appeared torn. Kutaragi picked up on this and challenged his boss by asking if he was going to sit back and accept how Nintendo had treated Sony. This reminder of those fresh wounds filled Ohga with rage, and looking at what could be Sony’s bandage emboldened him to trust his gut. “There is no hope of making further progress with a Nintendo-compatible 16-bit machine,” he said. “Let’s chart our own course.”

Norio Ohga may have been the boss, but executing this order would not be an easy thing. His voice was loud, but not always louder than the collective scream of Sony’s board of directors. If they wanted to cut this project off at the knees, or continue to play mix-and-match with Nintendo, they had enough leverage to do so. To protect Kutaragi from this type of torture, and to protect Sony from potentially serious internal conflict, Ohga did some corporate reshuffling. Kutaragi and nine members of his engineering team were moved to Sony Music, which had a separate facility in Tokyo’s Aoyama district. At Sony Music, Kutaragi worked under one of his mentors, Shigeo Maruyama, and had the autonomy to beginning moving forward with his plans. It was still a small team, and taking this console from concept to completion was still a long shot, but at least they had a chance. And to give this project the best chance of going all the way, Kutaragi began to put together a team, which started with bringing in Phil Harrison in September 1992. Harrison knew games, having been the head of development for a software publisher named Mindscape, and his arrival marked a new level of seriousness for Sony’s solo console efforts.

Still, those efforts couldn’t be taken too seriously. As Kutaragi spearheaded hardware development and Olafsson pushed forward with the software, Sony’s board of directors continued to play tag with Nintendo. And on October 12, 1992, Sony was finally “it.” Exactly three days before Kalinske traveled to New York for the unveiling with Olafsson, there was a headline in the Seattle Times proclaiming “Nintendo, Sony Join Forces on CDs.” Since the article in question didn’t provide any specifics of what this supposed deal entailed, it was clearly meant to be a message from Sony’s old guard that they were still a force to contend with.

“It’s complicated,” Olafsson reiterated, shaking his head. “I realize this is not quite the response you were hoping for, but I think this actually works to our advantage.”

“How’s that?” Kalinske asked, sincerely hoping his friend had a good answer.

“Because,” Olafsson said with a wispy smile, “we can tilt the variables of the equation in our direction.”

The equation was for a next-generation console, and the direction that both Kalinske and Olafsson had in mind entailed a joint relationship between Sega and Sony. Although the relationship between the men (and their companies) had perhaps begun with the intention of sticking it to Nintendo, it had evolved to something much greater than that. There was still the feeling that by working together they could be stronger than Nintendo, but what made the relationship possible was a shared vision. Videogames were no longer just videogames, but rather a Trojan horse to get inside the living room and be at the forefront of the entertainment revolution. This was the level after the Next Level, and it was time for Sega and Sony to go there together.

“This is my thinking,” Olafsson explained, narrowing his eyes slightly. “This news will no doubt be greeted by those at Sony Music as it has been by both you and me—further undue nonsense with Nintendo. But beyond the frustration, there is a significant lesson to glean: Sony is still quite open to videogames, as long as they are running this race with a giant by their side. Well,” Olafsson said, his eyes popping open, “a giant is a giant is a giant, and I have a feeling that Mr. Kutaragi would be much more comfortable with someone of your stature.”

Kalinske considered this. “Do you really think he’d be able to work with SOJ?”

“Ah,” Olafsson said with a smile. “You’ve heard of Mr. Kutaragi’s reputation.”

“I think everyone in this room has heard of his reputation.”

“It’s true, he is no picnic to work with. But it’s also true that he’s brilliant, and he cares deeply about his work. So I would suspect that he’s smart enough to travel down the road most likely to take his work toward fruition.”

“Good,” Kalinske said, a weight lifting off his shoulders. “That all makes sense.”

“For the most part,” Olafsson said. “But what about on your end? There is the matter of Mr. Nakayama and his reputation.”

“Gee, Olaf,” Kalinske joked, “who spilled that secret?”

Olafsson tapped the side of his head. “Firsthand intelligence.”

“Nakayama-san can also be a difficult man to work with,” Kalinske acknowledged, “but when push comes to shove, he’s always stood by my side.”

“Good,” Olafsson said. “Good, good.”

With business out of the way, Kalinske and Olafsson discussed their families and plans for the holiday season, and then walked through the lounge together, enjoying what would be the first step in a long-term, symbiotic, and game-changing relationship.

“Will you have time to take in some sights before leaving?” Olafsson asked.

“Just one sight, unfortunately.” Kalinske replied. “And it’s in Long Island.”

Olafsson raised an eyebrow, until he realized what could possibly be worth seeing out there. “Please say hello to Greg for me,” Olafsson requested. “And ask him to tell you about his recent visit to Germany.”

“Why, what happened in Germany?” Kalinske asked.

“I’d tell you myself, but how dare I deprive you the joy of curiosity?”