Twenty five years ago, Nintendo owned the game industry. Sega was an upstart challenger, and it could only compete by breaking the rules. Tom Kalinske, former CEO of Sega of America, was one of the chief rule breakers. He and his scrappy team helped launch Sonic the Hedgehog in North America, and within a few years of doing so, they took the dominant share of the North American industry.
That feat has been chronicled in books such as Console Wars (by Blake Harris). Kalinske went on to new adventures at Knowledge Universe, Leapfrog Enterprises, and Alsop Louie (which invested in Pokémon Go maker Niantic and in Twitch). Kalinske is now the chairman of Gazillion, maker of Marvel Heroes 2016. Kalinske has a lot of years of wisdom from doing business both inside and outside gaming.
We talked with him in a fireside chat at our GamesBeat 2016 event last week. Here’s an edited transcript of our interview. You can also view the video embedded below.
GamesBeat: If you could take us back, look back a little, what do you think were some of the most important accomplishments you had at Sega?
Tom Kalinske: After being out of the industry for 20 years, I think I’ve learned an awful lot in the last few days, so thanks for inviting me. At Sega, in 1990, when I joined the company, I think the most important thing I initially did was form the right team. Some of the people were already there. We brought a lot of people in. By the way, on diversity, six of our top 14 executives were women in 1991 in the video game industry. Think about that for a second.
We had a problem, though. Nintendo had 98 percent of the market. That’s a pretty big problem. They controlled retail. They controlled third parties. Third parties and retailers were afraid that if they helped Sega, they wouldn’t get their cartridges shipped or their hardware to fill shelf space. It was a difficult issue. We had to attack the problem in a different way.
We left Nintendo with what I would call the kids’ market, the 7-15 market, and we went after teens and college-age kids. We didn’t have the money Nintendo had, so we had to be clever in our advertising, do stuff like “Nintendon’t” and “Welcome to the next level.” We made fun of Nintendo in our ads, which they really appreciated. And eventually we started gaining on them.
We also did grass roots marketing. We had a college kid on a lot of campuses who was a good gamer. We’d give him Genesis hardware and then send him software. All we wanted back was for him to walk around campus and talk about how wonderful the Genesis and Sega was.
GamesBeat: That was a pretty unique insight in those days, to consider that games and the cartoon world that they represented were for more than just kids.
Kalinske: We ended up passing Nintendo in market share in 1993, with 52 percent of the market. Our Game Gear actually passed, for a while, the Game Boy in dollar share. The strategy worked. But it wasn’t me. It was me challenging the team to come up with unique strategies, do mall tours, compare our product against Nintendo’s and let people vote, openly vote. We’d usually get about 80 percent of the vote, so that worked pretty well for us. Sponsored rock concerts. Had expert game players playing with people watching, kind of a precursor to game contests.
GamesBeat: Why did you rejoin the industry as Gazillion’s chairman?
Kalinske: Dave Dorman, the CEO of Gazillion now, and I — our children played Little League baseball together. I got to know him. You get pretty close to other parents in Little League. We started talking about the game industry. A few years ago Dave and Nolan Bushnell and I tried to buy a game company and get back into the business. We weren’t successful at that, but we stayed close to each other. When he became an investor in Gazillion, and then became CEO, he asked me to go on the board.
I’ve been on the board for almost a year. The current chairman had to go out of the role and so they asked me to come in as chairman. I was happy to do so, because it’s a great company with a great game and a great team, much like Sega in the early days.
GamesBeat: You have Marvel Heroes. What are some moves Gazillion has to make to keep growing?
Kalinske: Obviously you have to keep improving. You have to keep improving the game. That’s being done. Certainly the download time is much better than it used to be. Getting into the game, really getting into it, is easier. If you don’t hook somebody in the first five minutes of a game now, you’re going to lose them. Now you can play with significant characters right away. That makes it more interesting.
You can’t just have one product. We have to have more products. We have to get on consoles. We have to get on mobile. We have to start learning about AR and VR. All those things — I can’t talk about the specifics yet, because we haven’t revealed them, but there’s a lot going on that will change the company dramatically.
GamesBeat: What are some differences between the game industry back then and the game industry of today? What have you noticed?
Kalinske: I could probably talk a long time about that, and I’ll try not to. One big difference is the size of the industry. Back in the ‘90s, when I joined Sega, the whole industry was maybe $4 billion. Today we heard about it being $100 billion. The movie industry was $25 billion back then. When we tried to start doing a rating system I went to Jack Valenti, head of the MPAA, and I said, “Let’s use your motion picture rating system on video games. We’re a form of entertainment.” He scoffed at me. “Video game industry? You guys aren’t important. Why would I want to do that and tarnish my rating system?”
That’s how people thought about us. As you know, the Senate was worried about video games addicting children and teens. It was going to hurt their grades. None of that happened. It was all nonsense. But they didn’t know it back then.
You had Nintendo’s dominance. It was all cartridge games. CD-ROM came in only at the end of my time. You couldn’t change a game. You had to make a game that was as close to perfect as you could. You could do another edition of it, but you couldn’t change it only fly the way you do now. There was no internet. Retail was all-important. The big retailers controlled the industry. We had no E3. Can I tell my CES story?
GamesBeat: Yeah, sure.
Kalinske: 1992, at CES in Las Vegas, you’d walk in and see the computers, nice new stuff, and the phones. You’d see the television screens. Then you’d walk past the porn section — I didn’t quite understand what that was doing there — and then you’d get to video games, way in the back. That particular year it was worse than in the back. They had us out the door, in a tent. It was raining in Las Vegas. The rain was dripping down on my Genesis hardware. I said, “That’s it. This is the last time we ever come to CES. We’re going to run our own show.”
GamesBeat: I was at that show.
Kalinske: I know you were! We got together with EA and Larry Probst and Activision and Acclaim, a few other guys. Sony only made software back then, mainly on our system. We decided to do our own show. We invited all the retailers, and they loved it. That was what evolved into — well, a lot of things happened. That evolved into E3, but also, because of the ratings issue on Mortal Kombat and Night Trap, it evolved into the Senate Hearings, which made us form a better industry association and a formalized ratings system. The rest is history.
GamesBeat: You went outside the industry as well. What did you learn there that you think can be applied to games?
Kalinske: I left in 1996. I was hired by Mike Milken and Larry Ellison to run something that became Knowledge Universe. We were using technology to improve education of all ages — young kids, middle school, college kids, adults, IT training. We formed or bought 36 different companies. A lot of them we started from scratch.
I learned that the ed tech business is a tough business. People would say, much like they’ve said about video games, that it’s hard to invest in ed tech and expect a good return. And yet it did happen. Many examples of that. By the time we were done with Knowledge Universe, nine years later, we had revenues among our different companies totaling over $2 billion. Leapfrog at one point was $680 million. We were using video technology to deliver young kids reading and math curricula to help them learn better, faster, and in more intriguing ways.
We had a lot of success and other companies had success as well. But the lesson was, you needed patience. Cutting-edge technology didn’t work right away. You needed a lot of time. You needed proof, much like we need here. The proof in the education world, particularly in schools, you need three or four years of research to show that a particular math game raised the level of understanding. That’s hard to do. It takes you two years to develop and then you have three years of research before anybody wants to invest in you.
I learned that these companies had to have really clear vision, really clear goals. Short-term one-year plans with definite milestones. A unique strategy. If your strategy is the same as everyone else’s, you’re going to fail. To be realistic about it, how are you going to protect your investors’ investment? Those were some of the things from the ed tech industry that are still applicable to video games.
GamesBeat: You kept a foot in it as a venture partner at Alsop Louie, the venture capital firm. You made some game investments.
Kalinske: Some of you know Gilman Louie was the founder of Spectrum Holobyte. They made some great simulation games and other games long ago. Then he went on to In-Q-Tel, the CIA’s arm into Silicon Valley. As a VC firm, we invested in something that used to be called Justin.tv. Some of you here know that’s Twitch.tv now. We led the A round, and we’ve been very happy with all the folks at Twitch, very happy with the outcome, selling to Amazon for almost a billion dollars.
We also were an investor in Niantic. We’re the only VC that is in Niantic. The report yesterday that said there’s no VCs in Niantic? We’re in Niantic, and needless to say we’re extremely happy with the progress John has made. Gilman Louie is on the Niantic board of directors. Those are the two we’ve done so far.
GamesBeat: What do you think of Pokémon Go, then? If you were launching Sonic Go, how would you do that?
Kalinske: [laughs] That’s a great idea. I love Pokémon Go. John talked about it yesterday. It’s the perfect marriage of virtual reality and a great license. It’s a 20-year property that started as little collectible characters. Then it was a card game. Then it was a series of video games and television shows. All those characters — I think there’s 720 total now? Something like that. What an opportunity, to get up on your feet with your son or daughter and wander around and explore and find these things and collect them. Brag to your friends how many you’ve collected. It’s a marvelous product, a marvelous game. They haven’t even started trading yet. There’s a lot of opportunities for the future.
Needless to say — somebody yesterday mentioned it was worth $3 billion now. We at Alsop Louie would be very happy if that’s true.
GamesBeat: We have augmented reality there. What do you see in the future around things like virtual reality games?
Kalinske: You’ve had a lot of people discussing that here who are far more capable of talking about that than I am. I was a proponent of virtual reality and AR back in the ‘90s. I worked with Jaron Lanier, one of the pioneers in VR back then. We had a Sega headset. We came close to bringing it out. We had a couple of games developed for it. There was one big problem, which was mentioned yesterday. The processing power wasn’t good enough. If you had this thing on for more than a few minutes, some people would literally fall down dizzy, and others would get sick. Obviously we couldn’t bring this product out.
To see what’s going on now, it’s fantastic. I’m enthralled by what’s already being done. I can imagine a lot for the future. As someone was mentioning yesterday, you could have a contact lens and a controller. I don’t think you’ll even need a controller. You’ll need voice recognition. You can be talking to some button somewhere and controlling the game with your voice or with a controller. This is going to lead to wonderful experiences. Imagine running down the Grand Canyon chasing something and seeing the grandeur of the scenery. Or biking through the streets of Paris or Berlin or London. Or solving a mystery in the Louvre.
My point is, there will be a lot of educational experiences as part of VR that aren’t even the intention of the game, but make the game more interesting. It’s certainly going to be good for everybody.
GamesBeat: You do think there’s a lot more that we can do with making education more game-like?
Kalinske: This is one of my ongoing passions. I’m still chairman of something called Global Education Learning. I’m on the board of Cambium Learning Group. I’m on the board of a company called APL, an education company, and a few others. We’re trying to use video game technology to make curricula more interesting and involving and intriguing for children, teens, and adults.
We’re making a lot of progress. We made progress at Leapfrog. You see ABCmouse now has a valuation of a billion dollars. Toca Boca was just purchased by Spin Master. That’s in the young kids’ area. In the older kids’ area you have Jessie Wooley-Wilson’s company doing math education in a video game format. That’s really effective for teaching algebra and higher math principles.
You see both Pearson and Houghton-Mifflin now using video game technology embedded in their curricula. They get the curriculum development and then they make it fun and interesting, which I think is what needs to be done. Then they collect the data and they can personalize that curriculum to each student, which is something we know how to do in the video game business. We can change a game depending on the level of understanding the player has. We can do the same thing today with students and curricula. That’s really important.
GamesBeat: Gaming is a $100 billion industry now. There are bigger industries. It’s not as big as it could be. What’s your hope for an inspired future for video games?
Kalinske: This is a great industry. We’ve come so far in the time I’ve been involved in it, from being disrespected to being respected, and with an understanding that students who are involved with video games — and almost everyone who is a student is involved with video games — are going to do better in STEM courses. They’ll do better in math and science and engineering and programming, learning how to code. There’s tremendous interest in that area.
The video game industry is now very respected. Maybe a lot of people don’t understand the value of the art form that we have, that this really is an art form. But certainly the impact on society — what a great industry for millennials to join. Millennials want to be part of an industry that gives back, that does something good. Here we are. We have so many opportunities for growth, so many opportunities outside of the United States. This could easily, in the next five years, be triple the size we are today.
I’m very optimistic about the future of this industry. I’m glad to be back, involved in it. I’m glad to be helping Gazillion. Hopefully I can help Gazillion grow. And also just to interact with the rest of you. It’s been a great experience for me.
By the way, if you could all read Console Wars, you’ll hear the whole history of Sega versus Nintendo.
GamesBeat: That’s an awesome book. Is that going to get turned into a movie as well?
Kalinske: Yeah. Seth Rogen and Evan Goldberg have the feature film rights. Supposedly they’re working on a script, but Seth is kind of busy these days. Sony has the distribution rights. Scott Rudin has agreed to produce. He did Moneyball, The Social Network, Captain Phillips, Budapest Hotel. He won two Tonys a few weeks ago for plays he was involved in. There’s also a documentary that’s mostly finished. I’m in the documentary a lot. That will be released at the same time as the feature film, as part of the marketing.
GamesBeat: In the meantime, we’ll archive this and you can be a star on YouTube.
Kalinske: Oh, that’s even better!