Is Sega the next Atari?

As CEO of Sega of America in the early 1990s, Tom Kalinske oversaw the company during its glory days, when all eyes in the industry were glued to the titanic struggle for console superiority between the Super Nintendo and Sega Genesis.

Times have changed, to put it mildy. Kalinske left Sega in 1996 and soon signed up with educational entertainment company LeapFrog, where he remains a vice chairman today. The intervening decades have seen Nintendo's best days as well as its worst, and the company sits in a distant third place in the current console race. Meanwhile, Sega hasn't been the same since Kalinske left. The Sega Saturn bombed. The Dreamcast signaled an end to Sega's days as a first-party hardware maker, and the ensuing decade-plus as a third-party publisher hasn't been all wine and roses, either.

"[Sega] seem to have made the wrong decisions for 20 years."

Kalinske spoke with GamesIndustry.biz earlier this month at the DICE Summit, just days after Sega announced staff reductions and the relocation of its San Francisco offices. Though Kalinske said he doesn't keep especially close tabs on the mainstream gaming space these days, he was shocked to hear his old company was pulling out of San Francisco. And while it might have seemed a foregone conclusion that Sega couldn't compete in the gaming industry once giants like Sony and Microsoft got involved, Kalinske dismissed the notion.

"It was not inevitable," Kalinske said. "It could have been avoided if they had made the right decisions going back literally 20 years ago. But they seem to have made the wrong decisions for 20 years."

Regardless of Sega's ability to best the deep-pocketed intruders, Kalinske said it could have joined them had the right decisions been made.

"One of the key reasons why I left Sega is when we had the opportunity to work with Sony, when [Sony Interactive CEO] Olaf Olafsson, [Sony Corporation of America president and CEO] Mickey Schulhof and I had agreed we were going to do one platform, share the development cost of it, share the probable loss for a couple years on it, but each benefit from the software we could bring to that platform. Of course, in those days, we were much better at software than they were, so I saw this as a huge win. We went to Sony and they agreed, 'Great idea.' Whether we called it Sega-Sony or Sony-Sega, who cared? We go to Sega and the board turned it down, which I thought was the stupidest decision ever made in the history of business. And from that moment on, I didn't feel they were capable of making the correct decisions in Japan any longer."

Regardless, there's still hope for Sega as a brand. And Kalinske should know, having helped breathe new life into flagging brands numerous times over his career, from giving The Flintstones a jolt with the introduction of a line of vitamins to bringing Barbie back from the brink in the early '70s. There's never a shortage of experts willing to pile dirt on a brand before it's truly dead, but as Kalinske emphasized in his DICE talk, "The Experts Are Always Wrong." That said, brands aren't immortal, and Kalinske did identify one thing strong enough to kill them.

"You have to really make a lot of mistakes to kill a strong brand."

"Stupidity," Kalinske laughed. "They're hard to kill. You have to really make a lot of mistakes to kill a strong brand. I do think some great brands obviously have been destroyed, Atari being one of them. Why didn't that survive? I think there's a lot of bad decision making involved in killing brands like that. I hope Sega isn't the same thing."

But even a destroyed brand has some value, some potential for future success. The Atari brand still exists, and people are trying to resuscitate it with a mix of familiar franchises, real money gaming, and fitness apps. Kalinske said even he and original Atari founder Nolan Bushnell saw value in it, as they attempted to acquire the name somewhat recently.

"And we failed in that effort, obviously," Kalinske said. "It was maybe five years ago. We weren't able to put it together. At the time it was owned by the French, and the French didn't want to sell."

Moving back to the big brands of today, many analysts and experts have called on Nintendo to get out of the hardware market and bring its valuable stable of intellectual properties to new platforms, specifically mobile devices. While it's another case that might fall under Kalinske's "The Experts are Always Wrong" dictum, he thought they might only be half-wrong in this case.

"I don't think [Nintendo] should give up hardware or consoles," Kalinske said. "I am surprised that they haven't formed a division to extend the IP. I'd love to play some of their games on my iPhone or iPad. It's really a form of marketing for them in a sense. They wouldn't even need to make that much money off it, but it would keep their brands relevant with the users, including people that are older, like me. So it seems to me it's a marketing mistake, but I don't think they should give up what they're doing because they're damn good at it."

"I don't think [Nintendo] should give up what they're doing because they're damn good at it."

In some ways, Leap Frog faces the same dilemma as Nintendo. It has its own hardware and software built using a proprietary language, so anyone wanting to play LeapFrog content has to play it on LeapFrog devices. And while the company makes consoles and tablets, they aren't exactly as ubiquitous as an iPad.

"We're struggling with that," Kalinske acknowledged. "It's a big internal issue and there's a lot of work going on in that area I really can't talk about. But from my perspective, I would love to see a way [to have LeapFrog content on mobile devices]--so long as it was profitable, because you don't want to do these things if they're not at least a little profitable. And that's what they're struggling with, because most of the education content on iOS doesn't make a profit. Almost none on Android makes a profit."

Kalinske's complaints with the educational app market on mobile devices should sound familiar to anyone who's worked on entertainment apps in recent years.

"There's an awful lot of stuff available that's losing money and isn't very good," Kalinske said. "So you have a mess out there right now. This is one of the criticisms I have of Apple. They should take a look at all the educational content on their site right now, it's terribly confusing to parents, and they ought to do a better job of curating that. Put some standards in and make sure that anything saying it's educational actually is, and get rid of a lot of stuff that isn't very good."

That seems unlikely to happen in the near term. Kalinske has been in the interactive edutainment field since 1996, and one constant he's seen is that the seismic overhauls that reshape interactive entertainment every few years don't seem to happen at the same pace.

"It's really hard to make a profit off doing education well. It's pretty easy, relatively, to do entertainment well."

"Education's been much slower," Kalinske said. "The adoption of really good technology has been much slower. It's still slow. It's still happening. It's great to see Massive Open Online Courses (MOOCS), but it's not great to see MOOCS that are boring. My whole thing has been to figure out what the great curriculum is, and then figure out ways to make it fun and interesting, whether that's for a young child or a college age student. Why does it have to be dull and boring lectures?"

There's a reason behind that slower pace of adoption for educational games, and it's one Kalinske said he learned back when he was still at Sega.

"We were doing the Pico, and Pico was a really good system for young kids," Kalinske said. "And we were doing $100 million in business from the Pico and its software. But it had a lower gross margin on it than obviously, entertainment software. And this is again during that time when Japan was making decisions for me. And they said to me, 'Stop wasting your time on that. It takes too much effort and too much money. You could just do another Sonic title and do a lot more revenue, a lot more profitably. It's easier.' And it struck me. That's why Disney hasn't been that good at education, or any of the other big entertainment companies, like Sony. Because it's hard. It's really hard to make a profit off doing education well. It's pretty easy, relatively, to do entertainment well.

"With the amount of storage that one can do today at a reasonable cost, no matter what the subject is, if we wanted to present that curriculum to children or even teenagers in a way that was most interesting to them, we could do that today," Kalinske added. "And we're not doing it. And that frustrates me."