David Rosen of Sega and His Vision for Arcade Games

David Rosen remains one of the most important executives to ever enter gaming. From his establishment of game imports into Japan in the 1950s, through his leadership of Sega for nearly 20 years, and even through his continued perseverance for Sega to remain a concern into the 2000s, he has taken more risks into unknown markets than most successful people. As both the effective head and spokesperson for Sega through much of its life, he left a great trail of insight from which to examine his ideas about the industry.

Rosen is one of the few people in his industry who had a very high level view of the problems presented to them. This came from both experience in a wide variety of situations like dealing with imports and being at the power center of international companies as well as simply a keen sense of what opportunities existed. For the coin-op industry he was a constant driver of new business models which would come to be adopted by those he preached to. It’s wrong to call him an oracle merely because he predicted the routes of the industry, but his executive oversight is something to be noted.

David Rosen (r)

In this post I’ve reprinted several writings by Rosen found in the coin-op magazines, one from the end of the 60s and the rest from the 1980s. The purpose of putting these here is to draw attention to some of the most interesting insider commentaries on the tumultuous coin-op market. Through Rosen’s eyes we can see some information which is hard to glean from the surface in reading through these coin-op magazines. He shows an aptitude for how much an audience can be pushed – whether that be consumers or business partners – and provides ample evidence to each of his pleas, even if they’re always tinted with the certain cynicism of promoting his company.

I’ll be providing some background commentary to each article so you can better follow along.


By the time Sega was entering the US arcade market in 1967, the industry had largely stalled on its grand innovations. The major manufacturers had types of games they specialized in like pinball, shuffle alleys, and novelty games, but there wasn’t much of a move by the industry to become bigger. By far the biggest obstacle to creating more extravagant games was the price per game, which had remained at a dime per play since World War II despite more than sufficient inflation to make each newer game harder to pay off. Two plays for a quarter was offered, but breaking the hurdle of a single coin for a single play at a new price point was difficult.

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When Sega introduced their game Periscope in both Japan and Europe, they set the game at a higher pricing model than usual, but when it came to the US they settled for the standard play price. Quickly after this though, Rosen went to the coin-op trades and made it his mission to get manufacturers, distributors, and operators to adopt 25 cent play. He argued that the spectacle of games like Periscope would command the attention of players even at a higher price. Below he states his case in even more business-minded terms.

NAME OF THE GAME IS QUARTER PLAY

by David Rosen — Sega

The name of the game this Spring is “Quarter-Play” and you can toss the rule book out of the window. One year ago the industry was divided on the question of “Will the public accept 2-plays 25¢?” Without pausing to assess the less-than-clear-cut returns, the question suddenly changed to “Will the public accept 25¢ play?”

Although hedged with a few qualifications, the answer is a very positive yes. Hundreds of operators have now proved conclusively over the past 18 months that “Quarter-play” with selected amusement machines can be exceptionally profitable.

What does it all mean? Why the quantum leap? Has an affluent and leisure oriented public suddenly lost its resistance to higher prices? The answers to these and other questions are hard to come by.

Operators cashing in on the surprising development are too busy to think about “the way it ought to be” while they concentrate on “the way it is.” Any rational explanation should include the fact that it is usually an exercise in futility to try and guess better than the public how the public will behave.

If the solid trend to “Quarter-play” proves anything, it proves that our business is closer than we thought to hundreds of other businesses where progress depends upon a combination of such elements as timing and pricing. It is important to ask “Will ‘quarter-play’ be good for the industry? Does 25¢-play hold the solutions to many of our problems?” Again, the answers would appear to be strongly affirmative.

The current trend had its real beginning here when SEGA Enterprises of Tokyo entered the market with three successive novelty games specifically designed and engineered for 25¢ play — Motopolo, Helicopter and Periscope. SEGA President David Rosen disregarded the strong advice of many sceptical friends and associates and shipped the arcade pieces with 25$ coin chutes (hoping that the extra work involved would convince distributors and operators to give “quarter-play” a fair trial on location). The scheme worked and a full-fledged trend was born. Many operators who tried the Periscope on 25¢-play reported results just a little short of sensational. The game, with its factory recommended “quarter-play” may well turn out to be the most profitable arcade game of the decade.

The problem of how to create an amusement game that is suitable for “quarter-play” may be partially related to the problem of how to make a 5¢ candy bar suddenly sell for 10¢ in a vending machine. The candymakers solved the problem for the vending operators by upgrading the product. They increased size, improved quality and adopted attractive new wrappers.

Amusement machines designed for 25¢-play have, by extension, followed the same general line. They have incorporated new audio and visual effects, good workmanship, and an innovative approach. The games have become more of a total experience. The easy response to “why 25¢?” is the reciprocal question— “What’s the market price for a new experience?”

But, if 25¢ is now the price-of- choice for sophisticated novelty games, what should other adjacent, location games earn? Dave Rosen, who has certainly been more than correct on 25¢-play, suggests that with one-of- a-kind arcade games bringing a quarter, the flippers and guns should be set at an interim 2-for-25¢. At the same time he stresses that strong efforts should be made to add “some- thing of value” to these games. SEGA, for example, added multiple sound units and target vendors to their own “Duck Hunt” and “Rifleman” when de- signing these gun games.

“Quarter-play” can readily help the operators to upgrade locations as there should obviously be a realistic value relationship between the per-play prices of different types of games. Similarly, a reasonable relationship should exist between an arcade price spectrum and the prices of common, non-related items.

People today think little of paying 25¢, 50¢ or more for public transportation, parking, soft drinks, magazines, tips, cigarets, shoe-shines, etc. It is as illogical to maintain a low price-per-play level on amusement games as it is to expect to continue purchasing games at levels prevailing many years ago.

Twenty-five cent play and a graded price structure graduating downward from this figure is essential for a healthy industry. When an operator says that he can’t afford to risk raising prices, he’s saying that he can’t afford to buy new and attractive games and that he can’t afford to stay in business.

The importance of proper pricing cannot be over-emphasized. An opera- tor’s pricing objectives should always include reasonable investment return and profit maximization goals. While there are many approaches to pricing, the point to remember is that value is a subjective judgment of the player— a judgment which can be intelligently influenced and directed. Operators owe it to themselves and the industry to charge what the market will bear after creating the conditions which make this possible.

Without higher income from locations operators will not be able to finance other new concepts such as fam- ily fun centers. They won’t even be able to pay their running expenses in an era of inflationary trends.

Happiness is an amusement game on 25¢-play that returns its investment in 2 months rather than a year. Why not give it a try?

Cash Box, 1969-03-29 page 65
Sega/Gremlin’s Visions ’81 conference, July 11th-13th, 1981

Over a decade after shifting the standard price of arcade amusement, Rosen returned with his eyes on an imminent collapse of the business. On July 11th, Sega/Gremlin held a conference they called Visions ’81 to introduce several new games and a new concept to the assembled distributors. Well, it wasn’t a new concept.

Video game kits involve the exchanging of a a game’s internals to change out the current game for another. The practice was tried in Japan and rampant in Europe, but for less than above-board business reasons. Piracy or grey-marketing importing of boards from the Far East to fit old cabinets bypassed the traditional manufacturer-distributor-operator relationship which left a great many people soured on the idea of kit games. However, their major advantage was in cost. An operator did not have to purchase a whole new game and exchange out the old one: The old one could become new.

As opposed to the slapdash attempts of less professional companies to create kit games, Sega/Gremlin planned a complete package which was both consistent and relatively easy to install. After this speech there would be a demonstration of changing the internals and decals of a Sega/Gremlin cabinet from one game to another within 15 minutes. It was an attempt to avoid oncoming difficulties which Rosen foresaw. However, since they were not immediately apparent to the assembled guests, there was general distrust of this approach.

David Rosen also takes the opportunity of this keynote to discuss the new, expanding locations for arcade games, feeding into his point about the necessity for a new approach. This includes Sega’s PJ Pizzazz locations, a high-tech Chuck E Cheese knock-off featuring robots. Only a few locations opened and it would go defunct around 1983.

This speech was delivered at the La Costa Spa and Resort on July 11th, 1981 for the Sega/Gremlin Visions ’81 distributor meeting in La Costa, California.

Keynote Address By Sega Chairman David Rosen

Welcome.

I believe you will find today’s meeting interesting and very significant — one that goes beyond a normal meeting of this kind.

As many of you have heard me say for years now. computer video games are an entertainment medium unto themselves. The consumer public and business communities have recently come to recognize the amusement games industry is a major force within the larger entertainment industry, and with good reason — although precise figures are impossible to come by. our studies point to the fact that cash box revenues of the amusement games industry are greater than either the domestic motion picture industry or the recorded music industry!

Industry surveys report that movie box office receipts totalled $2.7 billion in 1980 while the music industry chalked up revenues of $3.7 billion. Revenues of the U.S. coin-operated amusement industry are estimated to have totalled over $5 billion in 1980. That’s really quite something!

It is estimated about 700,000 computer video games are on location in the U.S. today.

Average earnings of all computer video games exceed $5,000 per year — and it’s common in today’s market for new “hot” games to earn $10,000-$15,000 during their first 8-12 months on location.

What accounts for this unprecedented growth which is truly a social phenomenon?

•Perhaps, firstly, unlike more passive forms of entertainment such as movies, spectator sports and concerts, computer video games give the individual the opportunity to actively participate, to test one’s skills, and to create a fantasy environment of his own choosing.

•Computer video games are truly teaching and learning machines which retain a player’s keen interest and perk the challenge in us all.

•By merging the worlds of computer science, communications and entertainment, the computer video games industry has devised an undisputed “formula” for success. Popularity of the games serves notice as to their fundamental entertainment value — and may in fact serve notice of the consumer’s underlying need to escape daily pressures and doldrums with an entertainment alternative to television or the movies.

•The serious observer of the computer video game phenomenon may conclude that these advanced forms of electronic entertainment enjoy broad-based popularity, in large part because the traditional alternatives of passive entertainment — such as television and motion pictures — fail to offer the combination of mental stimulation and personal involvement which are unique to computer video games.

Edging the social phenomenon forward are new family entertainment concepts such as Sega’s P.J. Pizzazz which I believe will fill a real entertainment and economic need in the 1980s and beyond. I would like to take a moment and for those of you who have not had the opportunity to visit P.J. Pizzazz to sneak in a commercial.

Incidentally, P.J. Pizzazz has just celebrated its first anniversary and we have announced our plan to open P.J. Pizzazz units nationwide through a combination of company-owned stores, franchises and possible joint ventures.

Social phenomenon and P.J. Pizzazz aside, we must not be lulled into believing, even for a moment, that our industry’s past success will be as easy to come by in the future. The rapid growth we have all enjoyed has brought with it some very real problems — problems which must be studied and analyzed and dealt with if the industry is to continue to grow and prosper.

Many of us have had separate conversations relating to the problems and trends we see before us. I would like to take a few moments to share with all of you some thoughts on these and other issues confronting the industry: market maturity, the pact of new game intro- ductions/trade-ins. game copiers, distributor capitalization and distributor complacency.

The first issue confronting our industry is market maturity — that is to say, market saturation. Much of the prime real estate for new arcades and street locations has already been pre-empted. Most regional shopping malls have arcades, and the 7-11’s of the world already have the latest in video games, or are testing the concept for their particular operations . . . This means the pipeline for new equipment sales will be slowing down. How long before we see this happening — my best guess is before year-end.

What will a matured market for new equipment sales look like six months from now? We should plan our business strategies around what will be a three-tier market segmentation for new equipment sales: the market for new “hot” games, the replacement market and the pipeline to new locations.

A word about each market segment…

Regardless of market maturity, we will continue to see a large and growing market for new “hot” games. But operators will be more and more selective in their choice of models as there are just so many “winners” an operator can absorb. Moreover, we will see a continuing trend in arcades to “banking” two, three, or four of the same model. The demand for new “hot” games, coupled with “banking” of games will add to distributor sales of the current “winners,” but will also take away from sales of the average $250 a week game. . . it’s wild, a game earns $250 a week and we stand here and call it average! Bottom line, we can expect to see the latest “hot” model sell very well, but the new equipment market for all other models may well be sluggish compared with sales levels enjoyed today.

The second and largest segment in a mature market- place is the replacement market, which Is enormous — estimated to be about 700,000 computer video games. This is where the bulk of future new equipment sales will come from. The problem is how to tap the replacement market realizing the economics of equipment trade-ins are not attractive to operators — except to purchase the latest “hot” new game. I have more to say about the replacement market and trade-ins later in my talk.

The third segment of a mature market for new equipment sales is the steady, albeit slower, stream of pipeline sales to new arcades and street locations. We can expect to see an increase in the trend towards “space theme” type arcades and rapid expansion of P.J. Pizzazz-type formats. Major chain street locations, such as Dunkin’ Donuts and Winchell’s Donuts, also offer significant opportunity for new equipment sales.

The words “market maturity” or “market saturation” may at first sound ominous and foreboding — however, change always presents new opportunities. And foresight and proper planning will allow us all to prosper from such new opportunities.

Pace of new game introductions/trade-ins.

The second industry issue before us today is the problem of rapid introduction of new games. Distributors and operators alike are being flooded with new games some “hot” and others not so “hot,” but nonetheless good money earners.

Broad player appeal and enthusiastic response to new video games has turned out to be a double-edged sword. On the one hand, both distributors and operators enjoy record sales and earnings. On the other hand, distributors and arcade and street location operators alike are virtually forced to carry all the latest games. The problem is common to every operator: how to have all the latest games, when purchase prices are up and trade-in values are down?

For example, every operator must keep in location the “good earning games” which today have relatively high trade-in values. At the same time, the operator must continue to buy the new “hot” games. Taking it one step further, when this same operator decides to trade in a particular model, his decision is made about the same time as everyone else. The market is then flooded with that particular model, and the floor drops out of the resale market. Therefore, the operator has little or no trade-in to offset the initial purchase price of a new “hot” game — and the problem then becomes “how do I obtain the capital to sustain operations?”

We can all remember back a few years ago when the timing of trade-ins was critical to an operator’s financial success. Today the element of timing is virtually non- existent; it’s simply a matter of survival that an operator must have all the best new games.

Suffice it to say for now that trade-ins are the key to tapping the huge replacement market discussed earlier.

The next item is the. Issue of game copiers. Game copiers are the scourge of our industry. These “outlaws” threaten the industry’s orderly growth and well-being.

By now we should all recognize the fundamental dangers to our industry If we condone the actions of game copiers.

The last two (industry) issues refer specifically to distributors.

The flood of new games has put a strain on the financial resources of distributors just as it has the operators As we all know, the prime rate is hovering around 20% which means that borrowing for most of us is in the 21% and higher range.

As a manufacturer who is also a major distributor and operator, Sega/Gremlin is sensitive to the financial pressures of distributors. Distributors are being squeezed from both sides: the manufacturer with ever increasing R&D and normal inflationary factors increases prices, and expects the distributor to take large inventory positions. On the other hand, the operator wants price relief from the distributor. More about this subject later.

Lastly, the issue of distributor complacency. With the industry issues just discussed. It is obvious this is no time for distributor complacency, no time for believing that record sales levels will continue indefinitely without returning to the basics which have, through your contribution, made distributors an integral part of the industry.

The handwriting is on the wall for anyone to read: if, in the long run, distributors do not provide a method to satisfy the critical “trade-in” problem, the operator will find and develop alternatives that may be less than desirable to us all.

It bears repeating that the real fuel of our industry’s growth is player revenues. Without the revenues, the operator can not buy new equipment from the distributor — and on up the ladder.

If player revenues are to continue at the record levels we all enjoy today, the player must be offered a continuing series of new and interesting games. We can not return to the past where simple cosmetic changes or rotation sufficed.

When faced with a decision to purchase a new game, an operator, therefore, has three options: a) buy the new “hot” game, b) refuse to buy the game or c) bootleg the game.

If the operator chooses to bootleg a game — that is to say, bring in an illegal copy — or if he refuses to buy the new game at all. both the distributor and the manufacturer lose out. On the other hand, an operator’s decision to buy a new “hot” game today is a real economic problem to him because eight months from now the game may have little trade-in value. This is the type of problem that faced operators in Japan two years ago.

Many of you have asked me over the past year, do I view what has happened in Japan as history which will repeat itself in the U.S. market? I believe the U S. will undoubtedly follow some of the trends seen in Japan and Europe — but, the impact will be quite different, certainly more on the positive side due to very different circumstances:

First, the boom period in Japan was based on the fevered excitement over one single-type game. Here in the U S., market growth is well-balanced over a broad spectrum of product offerings.

Second, the boom period in Japan was blown well out of realistic proportions by “amateur” operators who literally converted fruit stands and butcher shops to game rooms. This type of event has not happened here to any measurable extent.

Lastly, the higher concentration of population in Japan and Europe encourages a “boom and bust” fadishness. The balanced geographic dispersion of U.S. population tends to mitigate any faddishness.

For these reasons, and with care and planning, the U.S. market should evidence continued, well-balanced growth.

Many of you have been wondering where my comments are leading to. For the past two to three years Sega/Gremlin has been working on a concept which is founded in the real economic need of distributors and operators, as I have attempted to outline today. During the past two years, in coordination with Sega Japan, we have taken this concept and put it through the tedious process of implementation and field testing.

Sega/Gremlin has studied, reviewed and analyzed every market characteristic and trend from both the view- point of the distributor and the viewpoint of the operator. Sega Japan being both a distributor and operator certainly made this easier. I strongly believe it is a fundamental of good business that what is best for the industry is best for Sega/Gremlin — and this kind of thinking transcends every element of Sega/Gremlin’s planning.

And now the $64,000 question: What has Sega/Gremlin come up with that will support the distributor’s and operator’s position, and stem the industry issues just discussed?

As some of you may have already guessed — Sega/Gremlin will introduce to you today Its new video games — called Convert-A-Game with built-in conversion capability.

The Sega/Gremlln Convert-A-Game system represents the most recent state-of-the-art technology. The G-80 hardware system will accommodate as yet unrealized levels of sophisticated, complex game play. And conversion with Convertapak is incredibly simple!

Sega/Gremlin’s introduction of video game conversion will impact the industry at every level. For this reason, it is important to clearly understand the market ramifications of conversion; and how Sega/Gremlin’s Convert-A-Game system will impact you and your current and future customers.

First and foremost, Sega/Gremlln presents to you this marketing strategy only after we have proved to ourselves the benefits of Convert-A-Game. As you may know, con- versions are a way of life In Japan — and have been for over two years now. It was during this time we developed the Convert-A-Game concept.

Before the morning Is out, you will see for yourselves how Convert-A-Game and the economics of Convertapak offer virtually unlimited sales potential and opportunity to each and every Sega/Gremlin distributor.

I would like, at this time, to highlight Sega/Gremlin’s conversion capability and shed some light on where we go from here.

Sega/Gremlin’s unique G-80 hardware system provides the technological sophistication and tremendous flexibility needed In today’s marketplace. In comparison to the rather limited capability of cartridge/cassette systems, the Convert-A-Game G-80 hardware has built-in future capability to design games which are more sophisticated than anything seen to date.

As you can see, and through your experience with “Astro Blaster,” Sega/Gremlin’s G-80 hardware is modular in design. Housed within a card cage are six PC boards: CPU, memory, which holds the game program, video board, video background board, sound, and speech.

The card cage is situated in a newly designed cabinet which allows front entry. Quite simply — the PC boards to be replaced are slipped out, the new boards are inserted, and off you go with a brand new game. An associate will be up shortly to present a live demonstration of Convert-A-Game conversion including graphics and control panel. We will also explain how the program works on an everyday, on-going basis.

What does Sega/Gremlin Convert-A-Game and Convertapak mean to you and your customers? The best way to answer is to refer back to the key Issues confronting our industry.

Earlier I suggested the market can be viewed in three distinct segments: the market for new “hot” games, the replacement market and pipeline to new locations.

The Sega/Gremlin new game introductions that are being presented to you today, as well as future new models that will be introduced as Convert-A-Game and Convertapak, meet the needs of all three market segments.

As regards the market for new “hot” games, all indications lead us to believe the Sega/Gremlin new game introductions you will be viewing shortly are timely to the marketplace — and are dynamite at the player level. And with the purchase of such games you will be providing the operator with an additional major benefit — built-in resale value at a later date. How so? Convertapak conversion capability in the replacement market.

With regard to the replacement market, you may be envisioning now, as I do. two levels within the replacement market. On one level are your sales of Sega/Gremlin Convert-A-Games to operators who need to add or replace equipment for whatever the reason. And operators will want Sega/Gremlin Convert-A-Games not only for their earning capacity, but because they offer the real economic advantage of conversion. On the second level, in the future, are your sales of Sega/Gremlin new game Convertapaks. And sales of one complement sales of the other.

I’m sure you are all wondering about the economics of conversion, so let’s take a minute to go over it.

From the operator’s viewpoint, a new Sega/Gremlin Convert-A-Game will cost about the same as any competitor’s game without conversion capability. But the Sega/Gremlin game has built-in resale value of about $1,800 to $2,000 which should make for satisfied operators. And that resale value holds over time because it is based on game conversion, whether the original game is first converted after three months, six months, even two years from now. The operator may also find a tax advantage as conversion may qualify for one year tax write-off — you better check with your tax accountant on this point.

Next let’s examine the economics of an operator’s buy/no-buy decision.

The example on the chart shows an operator would enjoy incremental earnings of $2,400 during the first 32 weeks after Convertapak conversion to a new game. These incremental earnings are very attractive given a Convertapak cost of approximately $1,000. On the other hand, incremental earnings of $2,400 are really quite marginal if the operator must make a $2,000 investment in a new game, net of trade-in value.

From the distributor’s viewpoint, a new Sega/Gremlin Convert-A-Game earns him at least the same margins as before. Equally important, as you can well imagine, sales of Convertapaks a few months from now are quite attractive to the distributor as well as the operator.

And there’s more; we’re just getting rolling!

Looking back again to industry issues, I would like to explain how Convert-A-Game and Convertapak make a very positive impact on the pace of new game introductions.

I sense a trend which suggests the player is not only more sophisticated in terms of what he expects from a game, but is also less and less inclined to stay with a new game for any period of time. This would mean manufacturers will be forced to introduce new games at an even faster pace than today. The added pressure on operators to have all the latest hot games will increase significantly!

The problems of too many product introductions, high new game purchase prices and low trade-in values are all mitigated with Sega/Gremlln’s Convert-A-Game system.

It is important to remember that today’s great winner is next year’s problem unless you can convert the game to something new that’s also a top money earner.

Convert-A-Game is a concept whose time has come, and I believe Sega/Gremlin is the first to develop and implement a truly sophisticated and flexible system to meet current and future market demands.

The benefit of conversion in terms of distributor capitalization is fairly obvious. With less capital tied up in Convertapaks, a distributor can finance additional new business. The ability to finance additional sales should properly be viewed as Incremental business attributable to Sega/Gremlin’s Convert-A-Game system.

In addition to this is the fact of credit lines. For the approximate price of one new machine of $3,000 you can sell three Convertapaks!

We look at the industry as having about 700,000 computer video games on location. Over the next three years all these machines will have to be replaced. I leave it to your imagination as to the excitement and demand Convert-A-Game and Convertapak will create at the operator level!

We are talking about big numbers here, and careful planning is required on your part to insure the potential of your distributor businesses is maximized to the fullest.

I strongly urge that each of you give thought now, and plan towards year-end to set up a separate department within your existing facilities to handle Convert-A-Game conversions.

Lastly, in terms of planning for conversion, I expect each of you may have unique situations, or questions, which must be specifically addressed. Please feel free to speak to me or any of the Sega/Gremlin staff about this, or for that matter, about any element of the program outlined today.

I thought I may, at this time, spend a few moments anticipating some questions.

First off. Sega/Gremlin will continue to design and manufacture unique games other than the Convert-A-Game. Arcades, for example, will always require special effect games, a unique cabinet may be required for particular-type game play, and on and on. Sega/Gremlin will introduce several different models of its Convert-A-Game system, and each model will be available in standard upright, mini and table configurations. It’s hardly a secret that Sega/Gremlin is about to unveil the world’s first color X-Y game. Right off the bat that gives you and your customers two Convert-A-Game models — color X-Y games and standard raster monitor games — with which to enjoy the economic advantages of Convertapak conversions.

Lastly, Sega/Gremlin has beefed up its customer service function — and will continue to do so, even to the point of over-kill, to make absolutely certain we give you the customer service support you need. Field seminars including actual demonstrations of Convert-A-Game conversions will be scheduled throughout the country. We also plan to hold two or three day seminars in San Diego.

That’s about it. I’ll be around for two more days. I’d like now to turn the stage over to my associate. The two new games he will introduce — Space Fury and Space Odyssey — are dynamite. I hope you have as much fun selling them as we had designing them.

Cash Box, 1981-07-04 pages 41-43

In this follow-up article, Rosen iterates many of the same points as above in much the same language. It does appear though that he is also responding to criticism of Sega’s initial announcement for their Convert-A-Game line. He attempts to be extra clear by enumerating points about the advantages of the approach and specifically targets distributors for their unwillingness to jump on the concept. This likely did little to engender him to their sympathies, even though they would be regretting those sentiments later.

convertible games

by david rosen

OF SEGA ENTERPRISES

video conversions from a major U.S. manufacturer: what do they hold in store for the coin industry?

We must not be lulled into believing, even for a moment, that our industry’s past success will be as easy to come by in the future. The rapid growth we have all enjoyed has brought with it some very real problems — problems which must be studied and analyzed and dealt with if the industry is to continue lo grow and prosper.

Market Maturity. The first issue confronting our industry is market maturity- that is to say, market saturation. Much of the prime real estate for new arcades and street locations has already been pre-empted. Most regional shopping malls have arcades, and the 7-lls of the world already have the latest in video games, or are testing the concept for their particular operations.

This means the pipeline for new equipment sales will be slowing down. How long before we see this happening? My best guess is before year-end.

What will a matured market for new equipment sales look like in six months from now? We should plan our business strategies around what will be a three-tier market segmentation for new equipment sales.

A word about each market segment…

New “Hot” Games. Regardless of market maturity, we will continue to see a large and growing market for new “hot” games. But operators will be more and more selective in their choice of models as there are just so many “winners” an operator can absorb. Moreover, we will see a continuing trend in arcades to “banking” two, three, or four of the same model. The demand for new “hot” games, coupled with “banking” of games will add to distributor sales of the current winners, but will also take away from sales of the “average” $250-a·week game.

Bottom line, we can expect to see the latest “hot” model sell very well, but the new equipment market for all other models may well be sluggish compared with sales levels enjoyed today.

Replacement Market. The second and largest segment in a mature marketplace is the replacement market, which is enormous-estimated to be about 700,000 computer video games. This is where the bulk of future new equipment sales will come from. The problem is how to lap the replacement market realizing the economics of equipment trade-ins are not attractive to operators- except to purchase the latest “hot” new game. More about the replacement market and trade-ins later.

The third segment of a mature market for new equipment sales is the steady, albeit slower, stream of pipelines sales to new arcades and street locations. We can expect to see an increase in the trend towards “space theme” type arcades and rapid expansion of pizza parlor type formats. Major chain street locations, such as Dunkin’ Donuts and Winchell’s Donuts, also offer significant opportunity for new equipment sales.

The words “market maturity” or “market saturation” may at first sound ominous and foreboding-however, change always presents new opportunities. And foresight and proper planning will allow us all to prosper from such new opportunities.

The pace of new game debuts

The second industry issue before us today is the problem of rapid introduction of new games. Distributors and operators alike are being flooded with new games-some “hot” and others not so hot, but nonetheless good money earners.

Broad player appeal and enthusiastic response to new video games has turned out to be a double-edged sword. On the one hand, both distributors and operators enjoy record sales and earnings. On the other hand, distributors and arcade and street location operators alike, are virtually forced to carry all the latest games. The problem is common to every operator: how to have all the latest games, when prices are up and trade-in values are down?

For example, every operator must keep on location the “good earning games” which today have relatively high trade-in values. At the same time, the operator must continue to buy the new “hot” games. Taking it one step further, when this same operator decides to trade in a particular model, his decision is made about the same time as everyone else. The market is then flooded with that particular model, and the floor drops out of the resale market.

Therefore, the operator has little or no trade-in to offset the initial purchase price of a new “hot” game and the problem then becomes “How do I obtain the capital to sustain operations?”

We can all remember back a few years ago when the timing of trade-ins was critical to an operator’s financial success. Today the element of timing is virtually nonexistent; it’s simply a matter of survival that an operator must have all the best new games.

Suffice it to say for now that trade-ins are the key to tapping the huge replacement market discussed earlier.

Distributors’ issues

The following two issues refer specifically to distributors.

The flood of new games has put a strain on the financial resources of distributors just as it has the operators As we all know, the prime rate is hovering around 20% which means that borrowing for most is in the 21% and higher range.

As a manufacturer who is also a major distributor and operator, Sega/Gremlin is sensitive to the financial pressures of distributors. Distributors are being squeezed from both sides: the manufacturer with ever increasing R&D and normal inflationary factors increases its prices, and expects the distributor to take large inventory positions. On the other hand, the operator wants price relief from the distributor. More about this subject later.

Distributor complacency. Lastly, with the industry issues just discussed, it is obvious this is no time for distributor complacency – not a time for believing that record sales levels will continue indefinitely without returning lo the basics which have, made distributors an integral part of the industry.

The handwriting is on the wall for anyone to read: If, in the long run, distributors do not provide a method to satisfy the critical “trade-in” problem, the operator will find and develop alternatives that may be less than desirable to us all.

It bears repeating that the real fuel of our industry’s growth is player revenues. Without the revenues, the operator cannot buy new equipment from the distributor and on up the ladder.

If player revenues are to continue at the record levels we all enjoy today, the player must be offered a continuing series of new and interesting games. We cannot return to the past where simple cosmetic changes or rotation sufficed.

Operator’s dilemma

When faced with a decision to purchase a new game, an operator, therefore, has three options: (a) buy the new “hot” game, (b) refuse to buy the game, or (c) bootleg the game.

If the operator chooses to bootleg a game – that is to say, bring in an illegal copy – or if he refuses to buy the new game at all, both the distributor and the manufacturer lose out.

On the other hand, an operator’s decision to buy a new hot game today is a real economic problem to him because eight months from now the game may have little trade-in value.

This is the type of problem that faced operators in Japan two years ago.

Sega/Gremlin system

For the past two to three years Sega/Gremlin has been working on a concept which is founded in the real economic needs of distributors and operators. During the past two years, in coordination with Sega Japan, we have taken this concept and put it through the tedious process of implementation and field testing.

Sega/Gremlin has studied, reviewed and analyzed [?] market characteristic and trend from both the [?] of the distributor and the viewpoint of the [?] Sega Japan being both a distributor and operator made this easier. I strongly believe it is a fundamental of good business that what is best for the industry is best for Sega/Gremlin — and this kind of thinking transcends every element of Sega/Gremlin’s planning.

What has Sega/Gremlin come up with that will support the distributor’s and operator’s position, and stem the industry issues just discussed? Sega/Gremlin has introduced its new video games, called Convert-A· Game with built-in conversion capability.

The Sega/Gremlin Convert-A-Game system represents the most recent state-of-the-art technology. The G-80 hardware system will accommodate as yet unrealized levels of sophisticated, complex game play. And conversion with Convertapak is incredibly simple!

Sega/Gremlin’s introduction of video game conversion will impact the industry at every level. For this reason, it is important to clearly understand the market ramifications of conversion; and how Sega/Gremlin’s Convert-A-Game system will impact customers.

First and foremost, Sega/Gremlin presents this marketing strategy only after we have proved to ourselves the benefits of Convert-A-Game. Conversions are a way of life in Japan-and have been for over two years now. It was during this time we developed the Convert-A-Game concept.

I would like to highlight Sega/Gremlin’s conversion capability and shed some light on where we go from here.

Sega/Gremlin’s unique G-80 hardware system provided the technological sophistication and tremendous flexibility needed in today’s marketplace. In comparison to the rather “limited” capability of cartridge/cassette systems, the Convert-A-Game G-80 hardware has built-in future capability to design games which are more sophisticated than anything seen to date.

As with Astro Blaster, Sega/Gremlin’s G-80 hardware is modular in design. Housed within a card cage are six PC boards: (a) CPU, (b) memory, which holds the game program, (c) video board, (d) video background board, (e) sound, and (f) speech. The card cage is situated in a newly designed cabinet which allows front entry. Quite simply, the PC boards to be replaced are slipped out, the new boards are inserted, and off you go with a brand new game.

What does Sega/Gremlin Convert-A-Game and Convertapak mean to this industry? The best way to answer is to refer back to the earlier listing of the key issues confronting our industry.

(1) Market maturity. The market can be viewed in three distinct segments: the market for new “hot” games, the replacement market, and pipeline to new locations. The Sega/Gremlin new game introductions that are now being presented, as well as future models that will be introduced as Convert-A-Game and Convertapak, meet the needs of all three market segments:

(a) Market for new “hot” games. As regards the market for new “hot” games, all indications lead us to believe the Sega/Gremlin new game introductions are timely to the marketplace-and are dynamite at the player level. And with the purchase of such games operators will be provided with an additional major benefit- built-in resale value at a later date. How so? Through Convertapak conversion capability in the replacement market.

(b) Replacement market. There are two levels within the replacement market. On one level are sales of Sega/Gremlin Convert-A-games to operators who need to add or replace equipment for whatever the reason. On the second level, in the future, are sales of Sega/ Gremlin new game Convertapaks, and sales of one complement sales of the other.

• • •

Looking back again to industry issues, I would like to explain how Convert-A-Game and Convertapak make a very positive impact on the pace of new game introductions.

(2) Pace of new game introductions/trade-ins. There is a trend which suggests the player is not only more sophisticated in terms of what he expects from a game, but is also less and less inclined to stay with a new game for any period of time. This should mean manufacturers will be forced to introduce new games at an even faster pace than today. The added pressure on operators to have all the latest “hot” games will increase significantly!

The problems of too many product introductions, high new game purchase prices and low trade-in values are all mitigated with Sega/Gremlin’s Convert-A-Game system.

It is important to remember that today’s great “winner” is next year’s problem unless you can convert the game to something new that’s also a “top” money earner.

Convert-A-Game is a concept whose time has come, and I believe Sega/ Gremlin is the first to develop and implement a truly sophiscated and flexible system to meet current and future market demands.

(3) Distributor capitalization. The benefit of conversion in terms of distributor capitalization is fairly obvious. With less capital tied up in Convertapaks a distributor can finance additional new business. The ability to finance additional sales should properly be viewed as incremental business attributable to Sega/Gremlin’s Convert-A-Game system.

In addition to this is the fact of credit lines. For the approximate price for one new machine of $3,000, three Convertapaks can be sold.

Where do we go from here? We look at the industry as having about 700, 000 computer video games on location. Over the next three years all these machines will have to be replaced. I leave it to your imagination as to the excitement and demand Convert-A-Game and Convertapak will create at the operator level!

Sega/Gremlin will continue to design and manufacture unique games other than the Convert-A-Game. Arcades, for example, will always require special effect games, a unique cabinet may be required for particular type game play, and on and on.

Newer game systems to come

Also, Gremlin/Sega will introduce several different models of its Convert-A-Game system, and each model will be available in standard upright, mini, and table configurations. It’s hardly a secret that Sega/Gremlin is about to unveil the world’s first color X-Y game. That gives customers two Convert-A-Game models- color X-Y games and standard raster monitor games- with which to enjoy the economic advantages of Convertapak conversions.

Lastly, Sega/Gremlin has beefed up its customer service function-and will continue to do so, even to the point of over-kill, to make absolutely certain we give the customer service support he needs. Field seminars including actual demonstrations of Convert-A-Game conversions will be scheduled throughout the country.

Play Meter, 1981-09-15 pages 10-13
David Rosen (r)

1981 proved to be a watermark year for the cultural awareness of video arcade games to the general public. With this came questions not only about video game’s effect on society but society’s effect on coin-op. The once rigid, traditional market of people who played to win was making room for a new class of player who took to games as a broader, more casual interest. Many op-eds in the coin-op magazines were written about this new dynamic and how it might change the types of games put out by manufacturers.

Again Rosen shows his understanding of the customer base by offering a sort of primitive taxonomy of game players. He identifies three different appeals in arcade games: That of the “macho player”, that of the “high skill player”, and that of the “cartoon player”. While these types could conceivably overlap, he recognizes that the outer layer of a game is a different sort of appeal from its inner handling and skill. He doesn’t go quite to the level of assigning the cartoon player with the female demographic, but he does give a nod to the increasing role of women in their audience at this time.

On another point, he also seeks to discuss video games in relation to other entertainment media. With Sega being a subsidiary of Gulf & Western (and being a chairman himself), Rosen had a very direct view on how major media companies viewed video games. In 1982 the video part of the arcade industry would totally eclipse all other branches of media, so how they portrayed themselves was of import to many commentators. His response to these questions are to talk about the virtues of video games in their uniqueness among media with interactivity and the growing place of computers in society. Once again, he was on the right track of why this medium was truly important.

This talk was presented at the pre-AMOA show on October 28th, 1981 at the Marriott Hotel in Chicago, IL.

Video Games and the Role of Electronic Entertainment in Society

By David Rosen

CHAIRMAN, SEGA ENTERPRISES. INC

During the past year the industry has enjoyed unparalleled success-and I believe we would all agree the industry has good reason to look forward to continued prosperity.

During the past few weeks I have been involved in numerous interviews, and I’m sure many in this industry have also been approached by the major national news magazines and other media. The tremendously heightened media interest obviously stems from what the press calls “the phenomenon” of electronic video games. While the majority of media coverage the past year or so has been more inclined to “sensationalize” the industry – I now, however, sense a change of direction.

The media today is searching, and sometimes struggling. to understand and communicate to their readerships what it is this phenomenon is all about. There appear lo be two central issues:

First, is “the video phenomenon” a hula-hoop fad, or is it truly a major new segment of the entertainment industry?

And second. from a social viewpoint, does the so called Video Phenomenon have socially redeeming values? Is it advantageous to society or disadvantageous to society?

These are very searching Questions. and I’m sure all of us have given more than passing thought to these questions.

Computer games a passing fad?

Let’s for a moment examine the first major issue: are computer video games a passing fad or is our industry, as we have said for years now, an increasingly important segment of the overall entertainment industry?

Unquestionably, the key to the industry’s success has been our continued advancement of highly sophisticated technologies. The amusement games industry is in the forefront of pure and applied microprocessor technology – and I believe it is fair to say that our industry has made a significant contribution in exposing the long-awaited “computer age” to people everywhere.

It is eminently clear that computer video games are a sign of the times- and by that I mean the games are truly one of the early manifestations ot an electronic revolution whose technology will personally touch, on an increasing basis, all of our lives. Therefore, what the media refers to as “the video phenomenon” is in reality an evidence of the phenomenal acceptance of electronic entertainment in today’s computer-orientated society.

As the “age of technology” unfolds before us, making deeper and deeper inroads into the ways we conduct our daily lives – I can not envision, nor is there any reason to believe, that computer video games would be a passing fad. Quite the contrary, the signposts suggest a trend towards greater acceptance of present and future models of computer video games as “space age” forms of electronic entertainment.

But in order for the industry itself to continue to prosper, we must never lose sight of the objective of introducing new technology to the player-customer. As an industry, we have been enormously successful having as we do our roots m high technology. Creativity in the technical areas goes hand-m hand with creativity in the design and development of totally new game concepts and features-and new technology, in turn, is the prime reason the industry is able to maintain a high level of sustained interest on the part of a rapidly growing customer player-base.

• • •

In terms of the marketplace there appear 10 be three types of players, and probably more:

First, the macho player who gravitates towards action-packed futuristic space-theme games;

Second, we have the high skill player who is attracted to new game features which require the transference of previously developed gameplay skills;

And third, we have the cartoon game-player who may or may not be a skilled player, but in either case if attracted to a cartoon game as light entertainment somewhat analogous to a slap stick comedy movie.

“There is an expanding customer base of adults in higher age brackets – and it becomes clear that a variety of games are needed to satisfy the various groups of player-customers.”

Expanding market

Add to these player-types an expanding customer base of woman and male adults in higher age brackets and it becomes obvious that a variety of games are needed to satisfy the various groups of player-customers. Make no mistake, this is a very healthy trend for the industry because it moves us away from the instability and ”boom and bust” of one game fads, and towards a stable, broad-based entertainment industry which currently enjoys increasing consumer acceptance as an integral part o( today’s cultural life-style.

As much as new technology is the “life-blood” of the industry – it is important for us to recognize that new technologies alone are not the key to further market development. A second, equally important factor, is that we will need to satisfy the player-customer with more new games more often in order for the operator to continue to enjoy the level of earnings for new “hot” games he has quickly grown accustomed to.

• • •

I think it is extremely important that all of us measure the social issue carefully, and be able to speak fluently on the subject. What the industry has before it is an educational process which must not be underestimated in terms of its magnitude. and obviously, in terms of its importance to the future well being of the industry overall .

The detractors vs. our pride

Looking at the industry from one perspective. the past few years of prosperity have given rise lo instances of abuse which at times has placed the industry in a negative light.

l was driving home recently and saw two video games back-to-back on a sidewalk, fenced in, out in front of a fast-food establishment. As hard as we all work to upgrade the industry’s image, this kind of “street location” is extremely negative, and is exactly the kind of thing our detractors have every right to point to. I can hear it now at a city council meeting anywhere in the country: ”Video games in our community? No way! The games will wind up on every street corner! I saw it happen in Yourtown, U.S.A.,” etc. etc.

Manufacturers, distributors and operators must do a better job policing the industry – or we risk the possibility the self-policing privilege will be replaced by new regulations and ordinances. We must never forget the ultimate customer is the player – and that we are in the business of offering wholesome entertainment. in a wholesome environment.

However, not making light of occasional industry abuses, let us point with pride to the numerous social benefits and accomplishments of our industry.

Firstly, computer video games are an active rather than a passive form of entertainment. Activities such as television, movies. sporting events, and records or the radio all have a valid place in our society, yet all these forms of entertainment lack an important factor in satisfying a fundamental need. That need is active participation which is of course what computer video games are all about.

Second, as an entertainment medium, few if any other forms of entertainment afford the mental stimulation of computer video games. By their very nature, most forms of passive entertainment merely require that one absorb information. On the other hand, computer video games require the player to think and physically react in order to participate in the entertainment experience.

A third social benefit of computer video games are their value as an emotional release and means of expression-and perhaps they stimulate the mind to fantasize. Because the new technologies allow the design of sophisticated, complex game play, the games have an attraction to people of all ages. A visitor to most any game center during the lunch hour of a business work day is likely to find more player-customers in three-piece suits than not!

Fourth on the list of benefits: all educators agree the lack of discipline to concentrate is a major problem in the schooling of our youngsters. However, by their very nature, computer video games are teaching machines. They teach eye· hand coordination, and more important. they teach the much needed discipline of concentration.

Lastly, computer video games are an excellent entertainment value. Personally, I believe this to be one of the paramount reasons for the industry’s continued success. For the most part. amusement games in the U.S. have been at 25 cent play since 1966 at the time of the introduction of Sega’s Periscope – that’s 16 years of greatly improved product without a price increase.

“The entertainment value of electronic video games is one of the paramount reasons for the industry’s continued success: 25¢ play on a greatly improved product.”

It is imμortnnt that each and every one of us recognize that we are the industry’s ambassadors, and it is therefore of utmost importance that we communicate the positives of our industry, not only lot he media, but to all our customers whose operations, and actions, are viewed and Judged by the public at large. •

Presented at Sega/Gremlin’s distributor meeting, Marriott Hotel, Chicago. October 28, 1981.

Play Meter, 1982-02-01 pages 32 and 37-38

This final article could almost be seen as a farewell address by Rosen, though he did not actually leave the industry until 1984, and that was only temporary. Reading this though, you will get a sense of regret and melancholy over his word not being heeded. Like any good Cassandra story, it seems he is once again doomed to scream into the void.

So what’s gone so dramatically wrong since the optimism of the prior year? Well, as Rosen describes, in the middle of 1982 there was a total freeze on buying of new equipment by operators. While the first half of the year was going along the predicted rise, the end of the year bottomed out the market as operators found it impossible to afford new games. This was due to compounding reasons of games which did not continue to pay for themselves after only a few months on location, oversaturation leading to mass availability of games, and many operators buying their cabinets on credit. Every major manufacturer and distributor who was expecting to sell consistently throughout the year was stunned and frozen by this absence of orders, and it would only continue to get worse.

Rosen presents the choices ahead as a ‘crossroad’ for the industry to choose its fate. Not only does he once again urge for the adoption of kits, but he also calls on the industry to have a greater acceptance of consumer-directed approaches by the manufacturer. By this time Sega was moving into unprecedented territory by advertising arcade video games to consumers and taking a direct hand in converting their arcade games to home consoles. A call for welcoming this outreach is made, but the industry would never properly overcome its fear of the home console sucking their business dry.

Delivered at a Sega/Gremlin distributor meeting in La Costa, California on September 24th, 1982.

‘Our Industry At A Crossroad in 1982’

by David Rosen

The timing of this meeting is rather interesting. It comes after a summer that most of us would like to forget, and just before the new season that will next week be kicked off by the international trade show in Tokyo, and the following month by the AMOA Show in Chicago. In years to come we may look back on this specific period, the Fall of 1982 and the early part of 1983, as a very crucial transition period for the industry.

I believe you will find today’s business meeting both interesting and significant in terms of what it portends for the future. I should hope that we leave today’s meeting with new thoughts, new perspectives — and most important, a fresh new outlook on our industry.

I am certain we all clearly see that the industry’s business environment today, is not the same as that enjoyed only a few short months ago — and that the “boom market” of the past several years is, for the present, behind us. Not lost, or never again to repeat, but rather just behind us for the present time.

The First Major Crossroad

What, however, may not be apparent, is that for our industry, it is no longer “business as usual”. That our industry faces a major “crossroad” which must be dealt with in the months ahead.

But before we get into specifics, let me first put in perspective what I see as the crucial market and industry conditions which have brought us to the “crossroad” our industry faces today.

First and foremost is replacement versus expansion market conditions. As per the time-honored cliche, these are the times our industry separates the men from the boys. In contrast to the expansion market we have all enjoyed the past few years, the replacement market is a much more difficult environment in which to survive and prosper.

This is not the first experience of this kind for most of us. We have seen expansion markets in the past — but never the scope of this most recent expansion market. For example, we have had situations in the past where new foreign markets opened, and new opportunities existed for what we classify as an expansion marketplace — and this marketplace was possible for both new and used equipment.

We have also had regions of the country, due to changes of laws which suddenly allowed us a new expansion market, i.e., when New York opened for “flipper machines”. And most recently, the “electronic flipper” replacing the “mechanical flipper” which created a tremendous “boom” in “electronic flippers”, but of course a real problem for the vast inventories of “mechanical flippers” which came off the routes.

However, and this is important, we have never had an expansion market similar in scope to the video game explosion of the past three or four years. Never then, have we had the experience to draw upon and direct us from the dynamic expansion market into an orderly replacement market.

During the recent expansion phase when tens of thousands of new locations were opening, operators were “scrambling” for new equipment — there was never enough, and almost any new equipment would suffice as long as the operator also had a fair share of the “hottest’’ new game. In this environment virtually every manufacturer, distributor and operator prospered, how could they help but not?

And then came the shock! Operators noted a slow-down in average income per machine. They also looked around and saw a lot of new locations opening near their existing locations, with a lot more machines in each one of the new locations. It was not a case of player interest declining, it was not a case of people playing video games less, but there were simply a lot more machines with which to share essentially the same player-base.

The real shock to operators came when the realization sunk in, that there were fewer new locations to open. There were not the new locations being offered to operators as in the past, with a continual expansion from month to month — location to location. And in turn, what did this mean? It meant a leveling off of cash box collections. And this indeed, was a real shock!

Obviously, for those operators who were accustomed to paying their bills on machines purchased from the collections of those machines, the shock was on a “Richter Scale” of 3 to 4. But, for those who were used to paying their bills from expanded revenues, expanded locations, the shock was on a “Richter Scale” of 9 to 10.

And so today’s replacement market is quite a different story from that of the recent expansion market. Operators are no longer “scram- bling” for new equipment. . . not even the “hottest” of the “hot” new games. Quite the contrary. In this “shock stage” of the replacement market, and I believe we are only refer- ring to a transition period we are now going through, the operator looks to maintain revenues and simultaneously limit new equipment purchases.

Even though the operator generally knows these two objectives can never be had in concert, there is still a strong tendency for an unduly conservative attitude, which often takes precedence over more rationale thinking.

I believe the contradiction of maintaining revenues and limiting new equipment purchases, fairly expresses the mood of the marketplace at this time, and during this period of transition from an expansion market to a replacement market. Needless to say, this attitude represents a dangerous direction for the industry.

Another important factor which brings us to an industry “crossroad” is what I refer to as “secondary conversions”.

We can all sit around and bemoan, or resist, or ignore altogether the economic realities of a replacement market — but this will not make the economic realities go away.

In a replacement market, the operator must weigh every new equipment purchase in the light of incremental earnings — and in so doing, cheap conversions offered by “second and third tier manufacturers, and distributors, can mistakenly appear very attractive.

What is overlooked, or ignored, by the operator in his search for cheap new games is the shoddy appearance of these “secondary conversions” — and because these conversions are generally synonymous with inferior games, the combination of shoddy appearance and inferior game-play always results in lower location revenues.

We have only to look to Europe to see the unfortunate impact of “secondary conversions”, which have come about of economic necessity to the operator. But, and this is very key — I cannot emphasize it strongly enough — conversions in Europe were not marketed to the operator in an orderly and well-conceived fashion, and this fact is one of the key reasons why the European coin-op amusement industry is today, in such a state of disarray.

Japan, on the other hand, is a totally different replacement market than either the U.S. or Europe. Conversions there are a somewhat more orderly way of life than in Europe — first, because manufacturers also serve the distributor role, and second, the major manufacturers are also among the major operators in Japan. Nevertheless, the underlying rationale are no different in Japan than in Europe — and no different, for that matter, than in the U.S.

The big difference in the U.S. is that we are in a very enviable position. . . We have the opportunity to observe and learn from other world markets, and to do things differently. If we bury our heads, if we don’t learn from past mis-judgements, and if we don’t grasp the market opportunities before us… it is clear to me that “business as usual” will, in the not too distant future, serve to bring to an end the U.S. distribution system as we know it today, and which has served the industry so well, these many years.

These are strong words, and all of you know me well enough — they are not said lightly!

Back to the market and industry conditions which brought us to the “crossroad” our industry faces today.

Illegal game copies, and dumping and discount pricing of same, are additional conditions which can easily disrupt the sensitive balance of a replacement market such as the one we are in today.

What all this adds up to is that if we want to continue having an orderly market for the manufacturer, and for you the distributor, we cannot continue as we have in the past.

What I believe is the most important immediate problem facing us today, is the lack of conviction on the part of the operator as to the fundamental health of his operation. And thereby, a lack of new equipment purchases on the part of the operator.

You can draw the scenario as well as myself: lack of new equipment going into a location soon results in downturn in revenues, which then feeds on itself for a further downturn in revenues, and on and on with operators getting even deeper into “secondary conversions”, illegal game copies, bastardizing older models to save a buck or two — no semblance of the market order. It’s horrifying, but not difficult to imagine the European scenario repeated here in the U.S. if we let it happen!

So these are the market and industry conditions facing us. What are the “crossroads” we refer to? As a manufacturer, it will never again by “business as usual” for SEGA. . . Why? Because I believe, based on what is happening throughout the industry, SEGA’s business relationship with you, our distributors — is in the process of change. And this change or “crossroad”, will be just as true for the typical distributor/operator relationship.

Changing Role of the Distributor

In what ways is the distributor’s role changing? Today (and into the foreseeable future) the distributor’s amusement business is almost entirely focused on computer video games. By way of comparison, only ten years ago the bulk of a distributor’s amusement business was centered on “flipper games” and music. This change in product mix has had profound impact on the ways a distributor conducts his business, and an equally profound impact on his customer/operator relationships.

Gone are the days when operators had to rely heavily on distributors for parts and service of hundreds, if not thousands of complex, “mechanical flipper” and music equipment components. Computer video games have few moving parts — and PCB service, although extremely important and not to be minimized, does not allow for the continuity of contact, as in the past.

Trade-ins, suffice it to say, follow the simple laws of “supply and demand” which make operator trade-ins not economically attractive to a distributor.

In the past, however, an operator counted on trade-ins as an economic way of life. And likewise, the distributor knew full-well the “ripple effect” would allow him to place used equipment with other operators. Today, unfortunately, the “hit” syndrome virtually negates any of the economic viability of trade-ins — and as a result, a substitute for the traditional concept of trade-ins MUST be found.

Financing of equipment has traditionally been a key function of the distributor. Shorter product-life as well as financing terms, however, have combined to modify the role of the distributor as a financial intermediary.

What I believe remains untouched today of the distributor’s traditional role within the industry is the central distributor function, whose primary service to operators is two-fold: first, that of a factory representative who inventories finished product, and second, that of an “equipment consultant” to those operators who would choose to heed such advice.

I suspect by now you may be asking yourself what all this is leading up to. . . What does Dave have in mind when he speaks of a major “crossroad” facing the industry, of a change from “business as usual” — for SEGA as well as SEGA’s distributors?

In the “good old days” which gave birth to upwards of 1 million video game machines on location today — a manufacturer would see his role as that of the designer and builder of equipment sold to operators through distributors. I would venture to say that most coin-op manufacturers still view their role in this limited way.

Yet. . . the industry has grown by leaps an bounds in just a few short years. And the axioms of business are the same for use, as another industry — companies which can not, or do not, keep pace with the changing times simply fall by the wayside — be they manufacturers, or distributors, or operators.

I should hope we all recognize that the coin-op amusement industry is grown-up, and is perhaps analogous to an adolescent discovering adulthood. No longer will there be large increments of growth at the expense of alternative forms of entertainment, such as motion pictures or recorded music (that is, record and tapes). The coin-op amusement industry is today a major segment of the overall entertainment industry — and as such, we have a major market share to protect and nurture.

In times past you have heard me describe SEGA as a company which straddles two major industries — with one foot planted firmly in high-technology, and the other foot planted firmly in the entertainment industry. I believe this will always be an apt description of SEGA, yet, now there is more.

SEGA is not only an arcade video game designer and manufacturer selling to operators through its traditional distribute network. More than that, SEGA has expanded its role to that of a consumer entertainment marketing company.

I believe that the basic principles of consumer marketing hold the key to our industry’s future prosperity. I have repeatedly, spoken of a major “crossroad” facing the industry in the months ahead — and clearly, the industry’s ability to change with the times, to “do its thing” in the consumer marketing arena — is what I believe to be the first major “crossroad” we all now face.

This so-called “crossroad” is really an attitude, a “mind-set”, a business outlook of the past that must change. The “crossroad” is a conscious decision, a conscious effort to redirect our thinking from solely that of a “manufacturer/distributor/operator” perspective to a significantly broader “consumer marketing perspective”.

Specifically, it means the manufacturer and distributor must place an increasing emphasis on advertising and promotion as the means to an end. That end, or ultimate objective, is obviously to sell as much new equipment a possible.

And equally important, advertising am promotion serve to achieve two additional primary objectives — two objectives which are not readily definable in terms of equipment sales, but nevertheless are extremely important to the industry’s health and vitality.

The first primary objective of advertising and promotion relates to consumer momentum.

We need to recognize the fact that we have priceless asset available to us — and whether or not we choose to use it, will prove to be a major “crossroad” decision. That asset is the industry’s continued strong momentum which stems from the past few years’ tremendous growth in popularity of arcade video games. No doubt this is the result of several interrelated factors:

• First, technology — and new stimulating games

• Second, the explosive growth of new locations over the past few years

• Third, the unprecedented media coverage of our industry

• Fourth, the growing popularity of personal home computers, and with it, the conscious (possibly unconscious) recognition that the “computer” is becoming an integral part of daily life

•And lastly, the tremendous popularity of home video games — and the advertisement and promotion supporting same.

Consumer awareness, and acceptance, of arcade video games is unquestionably at an all time high. That we recognize the fundamental importance of this consumer momentum — and direct our actions positively — is, I believe, the single most crucial factor which will impact our industry in the months and years ahead.

As we all know, the consumer — our player/customer — is more and more selective in his choice of video game entertainment. With consumer awareness of video games at an all time high, it is crucial that we — the manufacturer and distributor — “Profile” specific new models, and stimulate player interest and location demand for fresh new games which have “hit” potential.

If new, “hit” games do not find their way to the marketplace in significant numbers, it will only be a matter of time before the player and location operator ultimately become disillusioned with the industry’s entertainment offerings. . . this in turn will set in motion a decline in player interest and a loss of consumer momentum — and the industry will un- questionably wind-down to something smaller than it is today!

High consumer awareness means television, radio and print advertising, and national promotional tie-ins with major consumer- oriented companies. These kinds of advertising and promotional activities serve to underscore and maintain consumer momentum, in four important ways:

(1) First, television and radio advertising and promotional campaigns “Profile” the hit games, and stimulate player interest and location demand.

(2) Second, sustaining consumer momentum through product advertising and promotion means the industry will keep its current player-base which otherwise will decline through attrition, lack of interest, and com- petition from other entertainment alternatives which are fighting for the same consumer entertainment dollars.

This is really an interesting turn of events — it seems to sum up a lot about our industry’s growth! Here we are today talking about product marketing — and sustaining market share against alternative forms of entertainment. Only a short while ago, we felt that arcade video games were an entertainment alter- native to motion pictures, and records and tapes — not the other way around! Times have changed, the industry is grown-up, and our thinking is in the process of change. This change is the “crossroad” I speak of which is facing our industry today. It is this change in thinking which must be expanded upon to break away from “business as usual”, and free us to function in new ways which will continue to move the industry forward.

(3) The third way product marketing underscores and sustains consumer momentum, is to push up arcade video game revenues as a direct result of the consumer awareness created by television and radio advertising, and national promotional campaigns.

(4) Last, consumer marketing through television and radio advertising is the best way to build industry image, and institutionalize the coin-op video game industry as an accepted form of entertainment.

The second primary objective of product advertising and promotion relates to illegal games copies, “secondary conversions” of existing models into inferior games, and the general bastardizing of equipment on location.

It is obvious to everyone that high profile exposure for new “hit” games will generate high interest and, consequently, will push up revenues for these games. And television exposure will draw attention to the obvious differences between the manufacturers legal model and the game copiers’ illegal model.

Equally important, location owners will be openly exposed to the comparative appearance and superior game-play of these new “hit” games in contrast to the “secondary conversions” and bastardized equipment which may be at their location.

And so we have it — the industry need for the changing role of manufacturers, and distributors — and with that new role, the coming of an era which will further strengthen and solidify the industry’s market share within the overall entertainment industry.

Two-Step Distribution

We, the manufacturer, cannot advertise and promote our products independently. This must be shared by you, the distributor, and to a lesser degree, the operator — and this is what we refer to as the “changing role of the distributor” in today’s market environment.

SEGA intends to use various forms of advertising — television, radio and print media — to promote and generate awareness of certain of our new game introductions. To establish through advertising an identity and recognition for SEGA’s new product, and generally to achieve all the primary objectives of advertising which we discussed earlier.

In short, to keep the momentum going. And as a SEGA distributor, we would hope and expect to see a high level of support from you, to take the word back to your operator/customers, and to coordinate with them.

How does the distributor community function within its new environment as a consumer-oriented, two-step distributor? Firstly, the distributor must further ally himself with the product he is representing — and in so doing, develop a stronger working relationship with the manufacturers he represents.

The distributor must do more to educate the operator with regard to the manufacturer’s new equipment — and by this I mean the selling points of each new model. SEGA’s convert-a-game and convertapak concept is a perfect example of new equipment with a particularly strong selling point.

Secondly, the distributor must make a total all-out effort to educate and renew the operator’s confidence in the long-term viability of his operations — and, to instill a “buying mentality” as the key to sustaining an operator’s revenue base.

This point must not be taken lightly by the distributor community. The operator must be made to clearly see that to maintain and stimulate player momentum through new equipment purchases, is fundamental to his business. That is to say, the steady flow of new traffic building equipment into an operator’s location is essential to assure his own business health and future well-being.

Thirdly — and this is the most elemental building block of a consumer-oriented, two-step distribution system — the distributor must support the manufacturer with a strong commitment of product and field representation.

In SEGA’s new role of a consumer marketing company, SEGA will be making substantial television and promotional commitments on your behalf. It is obvious that without your strong support, without substantial quantities of new product on location — the primary objectives of television advertising and promotional efforts cannot be fully achieved.

And last but not least, the consumer- oriented two-step distributor can support the manufacturer in ways which monitor the effectiveness of an advertising and promotional campaign. This would run the full gamut from publicizing these events — to supplying feedback and hard data regarding operator, location owner, and player reactions to various advertising and promotional efforts.

In essence, the distributor is the field marketing arm of the manufacturer, in many of the same ways the distributor serves today as the manufacturer’s product representative. And in this vein, for example, the distributor would make use of all promotional materials supplied by the manufacturer — such as posters and other consumer-oriented sales aides.

That about winds up what I see as the first major “crossroad” our industry faces today, and within the framework of consumer marketing — what I believe are the changing roles of both the manufacturer and the distributor.

The Second Major Crossroad

The second major “crossroad” is the realization and acceptance of the economic needs of the operator in today’s replacement market. And here the main element is un- questionably the very real need for a substitute for the tradition-bound industry practice of Trade-ins. In June, 1981, SEGA introduced its convert-a-game and convertapak concept. Not unexpectedly, there ensued much discussion and controversy. . . And not unexpectedly, SEGA’s convert-a-game system has seen little, if any, serious support from SEGA’s distributors. If it was not clear to everyone in this room last year, I cannot help but believe it is now obvious to all. . . The economics of a replacement market dictate some form of cost-effective conversion.

As you may remember, last year I welcomed the thought that other manufacturers follow SEGA’s lead and introduce their own form of convertible video game system.

Again I repeat what was said earlier, unless there is an economically viable way for the operator to introduce a reasonable number of new games into his locations, industry revenues will deteriorate to the disadvantage of everyone in this room.

It must always be kept in mind that in a replacement market the operator must weigh every new equipment purchase in the light of incremental earnings — and in doing so, the economics of a replacement market dictate some form of cost-effective trade-in — that is, conversion.

Sega’s convert-a-game and convertapak are the new way to trade-in used equipment. . . And most important, SEGA’s convert-a- game concept is conceived and positioned with great care, in order to maintain and sup- port an orderly U.S. market whereby the distributor continues to play a key role.

As stated last year, it is not SEGA’s intention to limit its R&D efforts to convert-a- game, nor is it technologically feasible for SEGA to have each new model be a convert-a- game.

Undoubtedly, it will be necessary for SEGA to design additional new convert-a-game concepts directed towards specific configurations and technologies. And in this way there will always be a continuous flow of new convert-a-game models to serve as the base for operator trade-ins utilizing SEGA’s various convertapak systems.

The object, again, is to bring the best new product to the public at the least cost to the operator.

Cash Box, 1982-10-23 pages 35-37 and 42

These are the words of one person among many, but I hope they were useful for contextualizing some of the most interesting periods in the history of the arcade. One would be wise to take the vision of people like Rosen into account when discussing the rise and downfall of the arcade in the early 1980s, as well as the situation which led video games to be adopted in the early 1970s. You might also notice a lot of very modern terms and language used to describe the unique aspects of the industry. Words such as “player-base” would not become common for many years to come.

David Rosen remains one of the most talented people to ever work in the video game field and though in retirement remains a voice worth heeding today.

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