Hideki Sato on the Sega Saturn (incredible new interview)

[Blades]

I wonder why this was and when it was addressed by Sega and Nintendo, if ever.

Sure, Sony owned their CD pressing plants but Sega had connections with huge Japanese companies (Hitachi etc.).

[Gryson]

I vaguely recall some discussion in the book Revolutionaries at Sony about CD-ROM manufacturing and distribution, and how it was such a game changer for Sony. I don't have the book on hand now, though. Basically, CD-ROMs could be manufactured extremely quickly, and that in turn allowed better control over supply. One of the big dangers of expensive ROM-based cartridges was over-estimating the demand and manufacturing way more than you actually sell, leaving you with a ton of dead stock that you have to clearance out at retail, repurpose, or destroy. With Sony's quick CD-ROM manufacturing turn-around, they could manufacture in smaller numbers and avoid the problem of excess inventory. I'm not 100% sure that's in the book, but I believe it's true in some regard.

As for why Sega was still slow--yeah, probably related to Sony just having a better CD-ROM manufacturing and distribution pipeline. One month for Sega isn't exactly slow, but one week is very quick.

One interesting point from Miyaji's comment is that I never considered how important all of this was for developers. Sure, it benefits Sony to have better control over manufacturing times, but it also benefits developers since their games could be released in a more timely manner.

[zyrobs]

I wonder why this was and when it was addressed by Sega and Nintendo, if ever.

Sure, Sony owned their CD pressing plants but Sega had connections with huge Japanese companies (Hitachi etc.).

Sony also had connections to a certain huge Japanese company. You could say it was a pretty close connection. As if they were one and the same, in fact.

[Blades]

Sony wasn’t that big at the time. Panasonic was bigger. JVC had their own pressing plants too.

Sounds like Sega was just mismanaged at the time more than anything to allow this to be Sony’s decisive advantage.

[zyrobs]

Sony wasn’t that big at the time. Panasonic was bigger. JVC had their own pressing plants too.

Sounds like Sega was just mismanaged at the time more than anything to allow this to be Sony’s decisive advantage.

Eh, no, Sony was the Apple of the hi-fi world in the 90s. It's one of the reasons why the Playstation was such a big deal.

As for Sega being mismanaged, I thought that was established and widely known already by this point.

[Gryson]

I don't think it's reasonable to expect Sega to have better CD manufacturing capabilities than Sony. Not only was Sony was an order of magnitude larger than Sega at the time in terms of revenue, but a huge part of their business centered around CDs. I mean, Sony did co-develop the CD and released the first CD player, after all. And the man who was leading Sony in developing the CD, Sony president Norio Ohga, was also heavily pushing the PlayStation.

So Sony had the power and resources to prioritize PlayStation CD manufacturing. Sega couldn't just go to whoever was making their CDs and tell them to put everything on hold. The music industry was still larger than the video game industry then - I wouldn't be surprised if Sega didn't have the clout to get its product prioritized over audio CDs. This is all speculation. We have no idea what the situation really was. But it's hard to say Sega was mismanaged because they didn't manufacture CDs as fast as Sony.

[zyrobs]

But it's hard to say Sega was mismanaged because they didn't manufacture CDs as fast as Sony.

No, they were mismanaged for 100s of other reasons, being slower to manufacture CDs was just the reality of the situation that they couldn't do anything about.

[Folco]

Just came across this:

In 2019, Koichi Miyaji (president and founder of Game Arts) gave his informed opinion about why Sony was able to surpass Sega and Nintendo with the PlayStation.

He said it wasn't due to royalties, but rather distribution. Nintendo, using ROMs, took three months to ship a game. In contrast, Sony took just one week to ship a game on CD-ROM. Even though Sega was also using CD-ROMs, it took them a month to ship a game.

This fast turn around must have been huge for developers, since it eased deadline pressure and put money in the bank sooner.

It's a perspective on the issue we don't often see, and it's all the more relevant coming from one of the more successful third-parties of the era.

Yes, this aspect was thoroughly discussed in Revolutionaries at Sony.
The mistake often made when talking about how Sony got an hold of the market is to solely focus on one aspect like the adoption of CD media when in reality Sony bested Nintendo and Sony not by doing the same things as them but better but by introducing a new business model whose traction lied on third-party support, in contrast with Nintendo and Sega first-party oriented attitude.
The whole decision making behind the PlayStation was shaped by the need to have the third-party publishers on their side therefore courting them in a unprecedented way by that poitn in time was critical for Sony.
So you have the quickest time of re-order in the business, royalties pay back on certain sales milestone (Sony gave back some percentage of the royalties if the game was a hit that sold more than certain thresholds), exclusivity deals and the purchase (Psygnosis) or funding of game companies (for example funding an action RPG from ex-dev who worked for Quintet which at the time was famous for action RPG and so on).

Looking at the licensing contracts from Sony, Sega and Nintendo for american publishers in early '97 you see that Sony was smoking the other two in term of attractiveness:

PlayStation (North America)

ROYALTIES

A. PER UNIT ROYALTY. The per unit royalty due under Section 9 of the
Agreement with respect to each Licensed Product shall be $7.00, unless
otherwise set forth below with respect to a Licensed Product:

B. ADJUSTMENTS TO ROYALTY - HIT TITLE REBATE

(1) In the event that the total purchases by Licensee from Sony
with respect to any Licensed Product exceed the following numbers of units
during the first three (3) years after first commercial shipment of the
Licensed Product, Licensee shall be entitled to a rebate with respect to
royalties paid by Licensee to Sony pursuant to Section 9 of the Agreement which
shall be credited to Licensee's account 60 days following the date that the
relevant royalties are paid, as follows:

7.1 MANUFACTURE BY SONY.

7.1.1 APPOINTMENT OF SONY AS EXCLUSIVE MANUFACTURER.
Licensee hereby appoints Sony, and Sony hereby accepts such appointment, as the
exclusive manufacturer of all units of the Licensed Products. Licensee
acknowledges and agrees that it shall purchase from Sony one hundred (100%)
percent of its requirements for finished units of the Licensed Products and
Inserts for such Licensed Products, subject to Section 7.1.3 below, during the
term of the Agreement. Sony shall provide to Licensee written specifications
setting forth terms relating to the manufacturing of Licensed Products and
their component pans ("Specifications") subsequent to execution of this
Agreement,


Licensee shall issue to Sony, for each of the Licensed Products approved by
Sony pursuant to Section 5. 1, a non-cancelable Purchase Order for at
least one thousand (1,000) units of such Licensed Product. In the event that
Sony manufactures the Printed Materials for the Licensee pursuant to Section
7.1.3 above, Licensee may, at Licensee's option, allow Sony to purchase an
additional 20% of such Printed Materials at Licensee's expense in anticipation
of reorders. Licensee agrees that such Printed Materials will be stored by
Sony for a period of no more than ninety (90) days. Licensee may order
additional units of any of such Licensed Products in the minimum reorder
quantity of one thousand (1,000) units per order, provided that reorder
quantities may be less than one thousand (1,000) units per order (but in no
event less than one hundred (100) units per order) in the event that either
(i) Sony has additional quantities of Printed Materials in stock, with respect
to any such Licensed Product, or (ii) Licensee agrees to provide its own
Printed Materials in accordance with Section 7.1.3 above. Licensee shall have
no right to cancel or reschedule any Purchase Order (or any portion thereof)
for any of the Licensed Products unless the parties shall first have reached
mutual agreement as to Licensee's financial liability with respect to any
desired cancellation or rescheduling of any such Purchase Order (or any portion
thereof).


Volume Royalty Rebate
------ --------------

a. Over 500,000 units and up to 1,000,000 units 3% of Royalty paid
with respect to such units

b. Over 1,000,000 units and up to 2,000,000 units 5% of Royalty paid
with respect to such units

C. Over 2,000,000 units 10% of Royalty paid
with respect to such units

(2) Each title shall be considered independently for purposes of
calculating and the rebates shall be cumulative. By way of example:

a. If Licensee's aggregate orders for a single Licensed Product are less
than 500,000, no rebate is available.

b. If Licensee's aggregate orders for a single Licensed Product exceed
500,000 but are less than 1,000,000, Licensee will receive 3% of the
Royalty paid as a rebate with respect to the first 500,000 units, at
the time Licensee places such excess order.

C. If Licensee's aggregate orders for a single Licensed Product exceed
1,000,000 but are less than 2,000,000, Licensee will receive 5% of the
Royalty paid as a rebate with respect to the first 1,000,000 units, at
the time Licensee places such excess order. (Please note that in this
case Licensee will only receive a 2% additional rebate with respect to
the first 500,000 units because they have already received a 3%
rebate.


Sega Saturn (North America)

MINIMUM GUARANTEED ROYALTY


The minimum guaranteed royalty and the per unit royalty for the Licensed
Products shall be in the amounts as follows:


w
1. PER UNIT ROYALTY: Seven hundred Japanese Yen (yen700.-)

2. MINIMUM QUANTITIES: The quantity of each Licensed Product to be manufactured under
the initial Purchase Order shall be no less than five
thousand (5,000) units. In addition, Licensee acknowledges and
agrees that its minimum reorder quantity for any of the Licensed
Products shall be not less than one thousand (1,000) units.

3. MINIMUM GUARANTEED ROYALTIES: To be determined in accordance with the per unit royalty and the
minimum quantities as described in this Exhibit H; provided that
it shall be no less than three million five hundred thousand
Japanese Yen (yen3,500,000.-).


Nintendo 64 (North America)

N64 LICENSE GAME PAKS
MEMORY CAPACITY NOA PRICE

32 Megabit $24.00
32 Megabit + E(2) ROM $26.00
64 Megabit $30.00
64 Megabit + E(2) ROM $32.00
96 Megabit $36.00
96 Megabit + E(2) ROM $38.00

PRICE INCLUDES AN INSTRUCTION MANUAL UP TO 40 PAGES. THERE WILL BE AN EXTRA CHARGE FOR MANUALS LARGER THAN 40 PAGES (INCLUDING THE FRONT AND BACK COVER).
EXTRA PACKAGING 
(MUST BE ORDERED WITH PRODUCT ON SEPARATE PO)
Game Pak Box $.20
Instruction Manual
(under 40 pages) $.35
Instruction Manual
(over 40 pages) $.75
Game Pak Label $.10
Game Pak Poster $.15
Warranty Card $.07

6.1 Minimum Initial Orders. Upon placement of an initial order, LICENSEE shall order a minimum quantity of Ten Thousand (10,000) units of a Licensed Product.
6.2 Subsequent Minimum Orders. LICENSEE may subsequently order additional Licensed Product in a minimum quantity of Five Thousand (5,000) units per title.
6.3 Purchase Price. The purchase price to be paid by LICENSEE to NINTENDO for the Licensed Products shall be in accordance with NINTENDO's pricing schedule currently set forth in the attached Schedule 1. The purchase price includes the cost of manufacturing, printing and packaging the Licensed Products and a royalty for the use of the Licensed Intellectual Properties. Schedule 1 is subject to change by NINTENDO at any time without notice.

[Folco]

As for why Sega was still slow--yeah, probably related to Sony just having a better CD-ROM manufacturing and distribution pipeline. One month for Sega isn't exactly slow, but one week is very quick.

I think that the crux was that Nintendo and Sega were ("is" in the case of Nintendo) pure videogame publishers which also happened to produce videogame consoles.
Their priorities were always centered around themselves and view third-parties as competitors who happened to take advantage of the popularity they brought to their consoles (in exchange of a licensing fee and the ability to rule over them in the case of the business third-parties were making on their platforms).
For Sony good third-party relationship was (is) crucial and so it was in Sony best interest to improve the bottom line of publishers.

One interesting tidbit contained in Revolutionaries at Sony is that at first third-party publishers didn't trust Sony new way to make business (not based on a initial big shipment but with multiple reorders quickly dispatched by Sony in case the game was a success) so Sony was forced to be the exclusive distributor of PS1 software in Japan in the early years, which pissed off big publishers whic already had an extensive sale network (namely Konami).
So in the beginning Sony was puchasing software from japanese third-parties (acting as a distributor) and was constantly discussing with them how many units to print.

[Gryson]

Nintendo 64 (North America)

N64 LICENSE GAME PAKS
MEMORY CAPACITY NOA PRICE

32 Megabit $24.00
32 Megabit + E(2) ROM $26.00
64 Megabit $30.00
64 Megabit + E(2) ROM $32.00
96 Megabit $36.00
96 Megabit + E(2) ROM $38.00

Let's put into perspective how brutal this is for third party publishers.

Let's say we have a standard 64 Mb game that retails for $60. Around 30% of the retail price is going to go to the retailer. So we're at $42.

Of that $42, $30 will have gone to Nintendo for manufacturing and royalties. So we're left with just $12.

But that's over-simplifying the situation. Third party publishers had to pay up-front for manufacturing, and they had to eat the cost of any unsold copies. With a three-month turnaround on manufacturing, they had to go all-in on the initial run (the vast majority of game sales occur within the first two months). And, with development costs skyrocketing during that console generation, they had to sell a lot of copies to make a profit. Let's say, to break even, 100,000 copies had to be sold (and for the sake of simplicity let's ignore that they obviously wanted to sell more than that to make a profit).

So, in our example, the publisher has to pay $3 million up front to Nintendo for 100,000 copies. Then, for each copy sold, the publisher gets $42.

OK, so the game sells pretty well and hits 75,000 copies sold. How much does the publisher take in? 75,000 x $42 = $3.15 million. Minus the manufacturing costs, they're at just +$150,000 with that many copies sold. That's way, way below what development and advertising cost.

From the perspective of the third party management, this situation is scary as hell for how risky it is. There's always so much talk about developers choosing console hardware based on the specs and all that, but I doubt it ever came down to that because the management would take one look at the numbers here and say "No way are we going anywhere near Nintendo."

[Folco]

The math worked in the case of N64 games because the average selling price was higher than PS1 games.
However as Gryson pointed out the real problem was the risk connected to doing business with carts and the fact that PS1 after holiday '97 was handily outselling the N64 everywhere (something never happened to a Nintendo console up to that point in time) so the leverage Nintendo had to impose their own business model was weak compared to the past.

Many depict Nintendo as fools for choosing carts for the N64 but in reality Nintendo knew very well how much profits they've made thanks to the cart manufacturing and N64 was just an successor on that line of thinkingthat brought them success and profits in previous generations.
What Nintendo didn't foresee was a new entrant that would scope the market by leveraging a new business model based on third-party games.
Until that point in time the popularity of Nintendo consoles was in large part brought over by Nintendo itself and if third-party publishers wanted to make business on the most popular game platforms on the planet they were forced to cope with Nintendo's requests.
During the 32/64 bit generation that wasn't the case anymore and Nintendo was reduced to play a secondary role.

People should never forget that, despite PlayStation global success, Nintendo outprofitted the Sony game divison for long stretches of time: