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There is a mystique about David Rosen, the man who co-founded SEGA Enterprises. Here is a man who founded an American company in Japan and rode the wave of Japanese prosperity. He is a big man and a powerful man, and he runs his affairs in a way that is similar to the president of the United States. When you receive a telephone call from him, your telephone righs, you pick up, and his assistant tells you that , “Mr. Rosen is calling for you.”
Most video game players have heard of Tom Kalinske, the flamboyant president of Sega of America. Though he is not as well known in the United States, many Sega enthusiasts also know about Hayao Nakayama, the chairman of Sega Enterprises. Interestingly, very few people know about David Rosen, the founder and co-chairman of Sega Enterprises.
If Rosen’s only story was about establishing Sega as a world power in video games, he’d still be interesting. Instead, Rosen’s story is intertwined with Japan’s. He started his company importing American coin-operated equipment to Japan less than a decade after the Second World War, while Japan was still trying to recover. As industrial Japan arose as a global economic power, Rosen switched from importing arcade equipment to exporting his own equipment around the world.
A private man with no desire for publicity, Rosen seldom meets with the press. He agreed to meet with Next Generation to discuss Sega’s legacy as an entertainment empire.
While serving in the Air Force you were stationed in Japan?
In the Far East, Japan included. The time frame was prior to and during the Korean War. Are you familiar what years those were?
Let me try this because that was um....early 1950's and was the end of the Truman administration. And of course McArthur wanted to go into China. So I'm going say it's early 50's.
It was '49-'52. Not bad.
Were you stationed in South Korea?
No, I was in the, basically I was in the unit that traveled a bit and I started in Shanghai and then went to Okinawa. I was in Korea during the war, then back to Japan. But most of the time was spent in Japan.
And you chose to stay in Japan after you were discharged?
No I returned to New York for a short period of time. I had actually established a company in Japan before I was discharged. And I returned to New York with the idea of furthering that company's interest in the United States, and at the same time attempting to take some additional classes in order to complete my degree. And as it turned out I decided to shortstop all that and I went back to Japan before I had the opportunity.
Did you call your company Sega at that point?
No, it was a company that was called Rosen Enterprises Inc., and....uh excuse me, Rosen Enterprises, Ltd. And the first business actually involved in art, strangely enough, which is about as far from the current business as you could be. In those years, Japan was still in a economic post war strata and consequently there was a lot of unemployment.
Artists were doing what was called portrait painting. I established a company that did portrait paintings based on photos. And at that time established a company in the United States to do this as a business whereby the photos would be sent back to Japan, the portraits would be done and the company would send the photo.
That business met with mixed results.
You didn’t stay in the portraits business.
I had gone back to Japan with the idea of another, second business idea which was... Basically at that point in time the people in Japan had a great need for ID photos. You virtually needed an ID photo for school applications, for rice ration cards, for railway cards, and for employment obviously.
We're talking now about 1953, 1954, and the photo studios generally charged 250 yen and it took 2 or 3 days to have the photos done. And my thought was that we had, in the United States, photomat studios where you go in for $.25--at that time it was $.25--and you could get four photos. And they were called photomats.
The little booths?
Little booths, and they were completely automated.
In testing these photos I found that they would not be suitable for ID photos because after a year or two years the photos would fade. I found that basically it was due to a lack of good temperature control. The machines didn't have the temperature control because people really weren't interested in getting a photo that was going last for two years.
So in making a study, I determined that if you had better temperature control, you could make a photo that would last for several years, 4 or 5 years. I then decided that the way to do this would be to make it semiautomatic whereby you would have the machine take the photo, but you'd have somebody in a booth behind the photomat who would develop the film with the proper temperature controls.
Did photomats go over well?
I took some of the older machines that were in the United States and redesigned them and brought them into Japan in the beginning of 1954. I called it Photorama, and we put out the first couple of booths, and it turned out to be wildly successful.
We charged at the time....I believe it was 150 to 200 yen. It was less than the 250 photographers charged, and obviously we were able to develop it in about 2 or 3 minutes. In Japanese we called it "ifrum sashi" which means ‘two minute photo’. And Photorama was the name of the brand.
This became so successful that it enabled me over a short period of time to open up well over a 100 such locations throughout Japan.
It was not unusual at different times of the year--there were different times when people would go through school applications and what not--that the line to get into the booth would be an hour, hour and a half.
For a 3 minute photo?
For a 2 minute photo. As I said, this was very very successful. It also enabled us to get very involved in the civilian marketplace, which again was very unusual because there weren't too many foreigners involved in supreme marketplace.
Sounds like the start of an empire.
The photomats were successful to the degree that the conventional photo studios became unhappy about the success that we were having because it was affecting their business. One day I got a call from the American Consulate [saying] that there was a minor demonstration going on regarding what they considered to be American unfairness in this particular little business.
At that point in time I decided to work out, what I believe, may have been the first franchising business in Japan. I agreed to make the system that I had developed available. We would supply the film to them on a franchise basis and they could use the Photoramas etc. I don't remember exactly, but probably another 100 or more studios were opened on that basis.
And thereafter, competition came in. Others had seen that, you know, this is something that could be designed by other people. And eventually a lot of competition came in and we probably closed down that division sometime in the early '60s.
Was the Japanese government as anti foreign business then as it has become since?
I don't agree that it's ever been really anti foreign business then or now. At that point in time you would go crazy with the regulations that were imposed upon any business, I don't think they were necessarily targeted for foreign businesses.
What is interesting, though, in those years is the fact that unlike today, Japan obviously had no dollars. If you wanted to import any product into Japan --now we're talking now about the '50s--you had to apply for a license. And that license application went through MITI (Ministry Industrial Trade and Industry).
It didn't matter if you were a Japanese company or any other nationality, you could not import anything without a license.
Licenses generally went into three categories. Category one was absolute necessities. Category two was [products that were] non-necessities but something desirable. And category three was luxury.
Well luxury was nearly impossible, I mean [they did not want money leaving their economy for] use on luxury imports.
Now what had happened it that during the Korean War this was probably the initial turn for Japan economically, because Japan benefited by some of the military procurement, U.S. military procurement during the Korean War. Obviously they were very close to Korea in geographically, so the U.S. military and government did a lot of their procurement in Japan. And this was as a big bolster for the Japanese economy.
When did you get into amusements?
Around '56-'57, I started to recognize the fact that for the first time there was starting to be some disposable income. For the first time there was a little time for entertainment. By this I mean, up until perhaps the mid '50s, '54, '55, most Japanese companies worked a full six days, and in smaller companies it wouldn't be unusual to work 6 1/2 days. This didn't leave you much time for leisure. You were fortunate, to get a good night’s sleep.
By, as I say '55, '56, '57, there was the first break of some disposable income and some leisure time, and I began thinking about how I could enter the entertainment market.
The thought of coin operated games came about by method of elimination. The popular entertainment at that point in time in Japan was Pachinko and dance studios and bars and cabarets. None of these were something I had any feeling to get involved in, so I thought, "Gee coin operated games."
Electro- mechanical games?
It was only electro mechanicals then. Even pinball machines were electrical mechanical. They were all electrical mechanical.
So I made a quick study of what and how the industry was structured and found that it was very limited as to the number of manufacturers, and that they were all centered in Chicago with no exception. They each had distributors and that basically they each manufactured 4 to 6 games a year, other then pinballs. It was pretty much a dying industry in the United States--dying in the sense that it wasn't growing.
I came to the United States with the idea that I would seek out the type of games that I felt most suitable for Japan. Then I went back to MITI to try and obtain a license.
And you've got luxury items now.
I had a luxury item and it took me over one year with a lot of effort and certainly a lot of introductions to convince them that this was something that would be good for leisure. Finally they granted a license to me for $100,000, which means that I could purchase $100,000 worth of merchandise.
So I came to the states with the idea of purchasing machines. The Japanese had a real desire for hunting and shooting, so I brought in an assortment of rifle games to Japan based on this $100,000 limitation. And I think the average game probably cost me about $200 used.
The duties in Japan, if I remember correctly, were like 200%. Worse yet, you paid through CIF which means you had to pay duties on shipping costs too. The duties were compounded.
Right off the bat, the machines were tremendously successful. And to play at that point was 20 yen. [The exchange rate was about 360 yen to the dollar at that time.] So you're talking about close to a nickel a play. At that time play in the United States was 10 cents, so the parody was 2 for 1.
For the past, I don't know 8 or 10 years now, it's been 100 yen in Japan, which is about $1, and it's 25-50 cents here. So it reversed itself. And of course this is one of the problems in the United States as far as operators are concerned.
I became known as a very live customer in the United States, because most distributors had warehouses filled up with used equipment that they really had no marketplace for. In those years trade-ins were a very big part of any distributors business. So when the operator buy a game, two years later he would trade it in. And at that time games primarily new were, distributor price to the operator was maybe $695, $795. And he would take a trade-in and give $50 or $100 for an older name. And they were just piled up in warehouses.
What games were popular with the Japanese?
One kind of game that was in very very big supply and yet very very good for Japan and these were the air guns.
The ones made by Allied Leisure?
No this was before Allied Leisure existed. I think they were Seeberg.
I was then opening up arcades throughout Japan at this point. They started to be in full blossom. We were stripping the cabinets off the machine, just keeping the mechanisms, and creating the jungle environment and trees and such. We would take one into the arcade and do this, and put these mechanisms behind so all you could see is the bear running in the jungle or the raccoon running up and down the trees.
And the business just took off?
We were fortunate. Based on my initial Photorama experience, we worked out a very good relationship with various movie studios, primarily Toho and Shursheko, so that they made their locations available to us. And particularly Toho, we probably had an arcade either adjoining or in the lobby of every one of their theaters. And I don't know how many arcades we eventually had but we certainly, went I left Japan, there wasn't a city in Japan that didn't have one of our arcades.
At that point I probably had the civilian marketplace to myself. We probably had it to ourselves for pretty close to a year and a half to two years, then other companies learned how we were importing and under what classification because every importation has certain classifications.
Obviously they applied under that classification and they started to import games and became competitors. The two companies that were most involved were Taito and another company called Service Games--the Japanese name was Nihon Goraku Buson.
Taito was headed up by a gentleman called Mike Kogan
The Russian?
The Russian. He has since passed away... a very good friend. And the other company was headed up by some Americans.
And Taito had a fair sized juke box operation going when they entered the arcade business. Nihon Goraku Bussan had a very very large juke box operation going on at that time, possibly the largest. And in addition, they had a factory. They had manufactured slot machines that were sold to the military, for military use. They were a very substantial company.
At any rate, Taito and Nihon Goraku Busson, primarily concentrated on their juke box operation and entered the game business primarily in smaller locations.
One quick question. Sorry to interrupt. You were paying almost $1,000 then to pick up the machine and get it delivered to Japan and ready?
Probably $600, $700. .
How much do you hope to make from a machine?
Well it's embarrassing to say this but the return generally was in less than two months. The profits of a machine are made the same as the profits of a theater seat or a plane seat--it depends on occupancy and on the time that it's used.
You can charge a dollar to play a machine, but if it's only used 10 times a day, you only make $10. Because all you're really selling is time. And our machines were constantly going. I mean it was going from morning to night. So the return was excellent.
When and how did you become Sega?
In the early 60's. As I mentioned earlier, the principles of both Taito and Nihon Goraku were good friends, obviously competitors too; but we were never the less friends. In 1964 going into '65, the principles of Nihon Goraku Bussan and myself had discussions about merging. They were by far the larger company based on number one their tremendous jukebox operation. They also owned property and a factory. Sega was their brand name.
So Nihon Goraku was the original Sega?
They were Sega in the sense that it was their brand name.
At that point in time we had decided to merge. And in trying to establishing the name of the company, we decided Sega was the best known name cause it was their brand name. And we took Enterprises from Rosen Enterprises, cause Rosen wasn't a brand name, it was just a company. And it became known as Sega Enterprises Ltd. And it became an even larger company obviously.
I became CEO/President after the merger. I guess, in a sense, this is really the second phase of Sega, the first phase being the phase I had given you prior to this which really is the two companies and their roots.
At what point did you start making your own games?
By 1960, maybe '61, we were all importing new games. We noticed there really wasn’t anything new about the games. There were cosmetic changes. The target would be different or the layout of the game might have changed, but basically the games were all the same.
The business or the industry in the United States was going further and further into the doldrums. When I say the industry, I'm talking about the game sector of the industry, and we decided that for the survival of our business in Japan, we best think in terms of developing some new equipment.
They had the factory, Nihon Goraku Bussan. They had the engineers. I had engineers too of course, and I had some game ideas. We decided this was the opportunity.
This really started the cut from Chicago. In 1966, we produced our first game. It was called the Periscope. If you talk to the old timers in the industry, they will tell you that The Periscope was a turning point in the industry.
It was a very simple game. You stood at one end and shot at cut out ships running on a chain through a periscope.
Kind of like ducks on a shooting gallery?
Something like that. We had a simulated plastic ocean, and then we had lights that ran across the ocean, and you had to release the torpedo in time to hit the ship. Sounds simple today and it sounds like something that perhaps a Toys R Us would sell. But at that time it was somewhat revolutionary.
Of course we had good sound effects whenever the ship would go in and it kept score of how many ships you hit. You got 5 shots for whatever the coinage was.
We had built it for our arcades in Japan. The machine was tremendously successful. Incidentally, your aiming device was a real looking periscope.
It was so successful that somehow, distributors from the United States and Europe flew over to Japan and wanted to see what this was all about. We had never really built it for export. It was sort of a....an erector set type of a construction that we could build it and put in on location and then we had to modify it a little bit.
Nevertheless we started to export it. And the price that was on it, the export price that we had made it about twice as expensive as any conventional piece in the United States. Instead of $695, $795 I think it was like $1295.
The operators complained. "You know it's a great piece but you really can't make money paying $1295." And we said, "No it's very simple. Put it on $.25 play, you'll make money." That was the introduction of $.25 play in the United States.
We would only ship it out on $.25 play. Obviously a distributor and operator could change it should you choose to. This launched Sega into the export business.
Several executives from Japanese game companies have had problems with the Yakuza. Was that a problem for you?
It was probably less of a problem for us then for them. Actually it was never a problem for us.
Really? Do you think you were left alone because you were American?
Uh, definitely. I remember a few instances, one of which was when we didn't know any better. We had opened up a Photorama booth in an area called Iraksho, which is was important to the entertainment industry as the Ginza is to shopping. What we didn't realize was that one has to pay their respects to the local...uh...shall we say....
Shogun?
Call them what you will. I hesitate to come up with a name. But you're supposed to pay your respects and say we are now in your, more or less, domain and doing this business. And we didn't, we failed to do this, just out of ignorance.
In this particular case we didn't realize that this particular party was that sensitive to the issue. And he sent some emissaries to tell us of his displeasure. And we then made a apology and it was explained to him by one of our Japanese managers that this was of course a foreign company and we're very sorry but he didn't know better.
But to answer your question, no. I mean really we had no problems. And I think probably the reason was because we were foreigners.
After the periscope, in realizing that we did have the ability to design acceptable games, we became very prolific. And I don't know exactly how many but we probably designed and produced 8 to 10 games a year. And each one of these became export products. And for the first time Chicago realized number one there was somebody outside of Chicago that had the ability to produce games. And number two that there was still a good industry out there if one really produced games that had the ability to attract player attention.
But you later stopped exporting games.
The game that broke the camels back was a game that we built, I believe....let's see that game must have been in the late '60s, maybe '69, a game called Jet Rocket. Word got out about this game. Every game we introduced was really novel. As I say, 8 to 10 games a year you took a lot of novelty. And every game we built we put out on a quarter play.
In Jet Rocket we had introduced a lot of new elements and took a lot of different type of sound, different type of special effects. While we were designing it we obviously showed prototypes to various people and sent out some prototypes for testing. This was going to be a more expensive piece. Unbeknownst to us, although we did get some signals from one of the manufacturers, all three of the main [Chicago] manufacturers decided to knock off this game. And each one was racing to be first.
Consequently what happened is that there was an over supply of this particular game. And at that point we decided well we really didn't need the export market and for awhile we stopped really exporting games for a couple years.
Sega was eventually bought by Gulf/Western. How did that happen?
We felt it was time to go public and we wanted to go public in Japan. Although I had spent a lot of time in dealing with one of the security companies that was trying to take us public, there were too many firsts involved. Number one it would have been the first time that a foreign owned company went public after the second world war. It would have been the first time a company in this industry went public in Japan. There were too many hurdles.
We decided that perhaps we should do something in the way of going public outside of Japan and looked at companies in the United States that perhaps we could purchase, public companies or private companies that we could take public, and then perhaps merge into those companies.
At the same time we had retained a security company/underwriter as our investment banker. And they had done a study of the company and they had come back to us and said, "You know, rather then what you're planning on doing, would you consider being acquired yourself because there are several larger companies in the United States that may be very interested in acquiring Sega." So we said, fine we'd certainly explore that.
So I and one of my partners then spent time going around meeting with various companies that were interested in talking to us. One of the companies was Gulf/Western. I don't know how familiar you are with the conglomerate years of the late '60s, but these were the years of the conglomerates, the ITTs, the Gulf/Western.
Gulf/Western was one of the pioneers of the conglomerates. They had shown a very good healthy interest in us. And in 1969 we signed a deal with Gulf/Western whereby we had sold them then Sega Enterprises. And Sega Enterprises became a wholly owned subsidiary of Gulf/Western.
When did you break up with the conglomerate?
At some point in time some other factors took place--including changes in management at Gulf Western. Charlie Bludon, [the CEO of Gulf/Western] passed away.
In '83 they had asked me if I would be interested in buying back Sega or forming a buyers group to do that, which I did. It included Nakayama and Mr. Okawa in Japan. We purchased the company back in March of '84. So that became phase 4.
At what point did Sega get involved with video games?
Sega was involved in video games, I can't give you the year but certainly very shortly after it started.
So in the Pong era then? The early '70s.
Certainly we were importing it from day one. And started production of other versions of, you know, video games shortly thereafter.
At what point did Sega get involved in the home video games and why was the company unable to get a foothold in Japan?
Unfortunately the Master System was probably launched, and again I'm guesstimating cause I'm not referring to notes, probably launched about a year and a half to two and a half years, maybe two years after Nintendo. By that time it was a Nintendo culture in Japan and it was very very difficult to launch a similar technology in Japan.
But you launched the same time as Nintendo in the United States?
No. In Europe I think we were probably about the same time, because Nintendo first satisfied the Japanese market then they went to the United States then thirdly to Europe.
In 16 bit technology we were first with the Genesis. And that's what helped up greatly in recapturing the market.
Was the Master System a better hardware system then the NES?
Well, I think in all fairness, there was no significant difference.
What is your role with Sega now?
I guess as I get more and more gray hair it's less and less. Primarily I'm obviously....I shouldn't say obviously, I'm still a director on the Japanese board and primarily act as a consultant/advisor to senior management in Japan. And as the occasion requires, troubleshoot elsewhere. And of course I'm a major stock holder.
Well Nakayama is obviously a very good friend that I brought in into the company in the late '70s. He had a company at that time that was called Esco Trading, which was primarily a distributing company. He was a distributor. He was fairly well known in the United States because of his aggressiveness in importing in to Japan and had fairly good knowledge of English.
I acquired his company basically to obtain his management. That probably was in '78, '79.
The Saturn obviously is not done as well as people had hoped.
Saturn in very successful in Japan. Basically it's done remarkably well considering the forces against it. There's no question that Sony is a very very viable competitor. And there's also no question that a lot of third party people have jumped on the Sony bandwagon. In spite of this, Sega has held it's own in Japan very well. To the best of my knowledge and the numbers that I receive, it's still a pretty much of a 50/50 market in Japan.
That is I think quite an achievement. It says quite a bit about Saturn.
In the United States, Sony in '95 has I think by most reports has outsold Sega but to appreciate that there are several factors involved. Number one, they were priced less than us to begin with and basically there is no question that the market is price sensitive and obviously that was very, very very good factor for them. Secondly they were fortunate in having a lot of software going right into the market when they introduced it. We didn't have quite as much. And that was the second factor.
I think that this bout is far from over. A lot will depend on what happens this Christmas season. And a lot of what happens this Christmas season is going to depend on the software because there's no question that in the end the systems are not dissimilar enough to sell on the virtue of the hardware. But the player/customer really approached it based on the games he's played and how much he's enjoyed the games, and thereby the software. So we would hope that by this Christmas season, a lot of the titles that we have out coming in will put us back on top. Now whether or not that happens will depend on the marketplace.
There's also another factor that always takes place in the introduction of any hardware system, and that is that the first time around the software developers have one level of ability and skill. The second time around they have an added ability and skill based on their experience, how you could best really utilize the hardware and how best you could really design a game. And our hardware may have been a little more difficult for the average third party designer to learn, but once they learn it, the other question is can they perhaps put out a better game then they can on the Sony system. And we'll see this Christmas.
Have you seen Nights?
Yes.
What did you think?
I thought it was very good. I think it's a very impressive game.
Sega has tremendous engineering and technology capability. It's an interesting situation that really comes out of our coin op business. Basically, due to the coin op business we have this ability to translate and transpose the engineering know how into consumer product, consumer oriented product. Sometimes we become over-sophisticated and think anybody can understand the operating system and thereby program for it. But that rectifies itself in time.
Many of your location based games, such as Jurassic Park, are a little too complex to ever make into console games.
I don't think every coin op game could be translated to a consumer game in it's present format. Obviously to various degrees they have to be modified.
Several games can be translated directly, and thereby this gives us a great advantage because, particularly in dedicated game systems as opposed to computer systems. In the dedicated game system most of the player base is very coin machine knowledgeable. When they hear a game is coming out, you know it really means something to them now because they're the same players that go to the arcades.
In computer games, as you know, the audience is a bit older. They may not have that exact reference to the arcade game. But nevertheless we do have an ongoing program to translate onto computer games and if you met the people at Sega Entertainment, I think it's going meet with a reasonable amount of success.
The Virtua games have done a lot to distinguish Sega as quite a power house.
Well, Sega has a very very big operation in Japan, and it's all game machines. And the operation in Japan last year - and you could refer to our financials, the information available - if I'm not mistaken, was approaching $900 million. That is a very sizable operation.
You know it's just a hundred million shy of a billion. I think the talk is it was billion operational. This certainly allows you to have a very dominant position in the design and manufacture of equipment because you're your own best customer. I would say Sega's strength is their engineering R & D capability and it comes out of the coin operated machine.