'Another plan involved buying Sega, the maker of the Dreamcast console. As far back as 1998, Microsoft had initiated talks to acquire Sega. The companies already had a working relationship since Microsoft provided software for the Dreamcast, but relations had soured in part because game developers didn't use that software. Sega was in third place with its console was still losing a lot of money.
Worldwide, Sega had barely sold 5 million units as of early 2000, giving it a base far smaller than Sony's estimated 73 million units. Moreover, the older Sony machine and the Nintendo 64 continued to outsell the Dreamcast. Sega had launched dozens of games in the United States, but only one of those titles, a football game, sold over a million units. Sega didn't gave the financial wherewithal to stay in the race, and that prompted third-party publishers like Electronic Arts to support the other consoles instead.
By buying Sega or otherwise investing $2 billion in the company, Microsoft could acquire not only the Dreamcast technology but a lot of talent that it didn't have, like Sega's nine game development studios--which had consistantly created hits like Sonic The Hedgehog, key sports titles, and Virtua Fighter. Sega also had a hardware design group that crafted new consoles.
Shoichiro Irimajiri, who was the CEO of Sega Enterprises in Japan, said his company was surprised to learn first from other game developers that Microsoft was planning to enter the console business. He was angry that he hadn't heard it from Microsoft first. His complaints led to meetings to discuss whether Microsoft and Sega could work together on the next-generation console. At first, he wasn't interested in selling out to Microsoft because the Dreamcast appeared to be doing well in the United States. The Microsoft side was equally lukewarm to the idea
"Every time we looked at them, we thought all we wanted was the software," said
Chris Phillips, who managed the Sega relationship until he left Microsoft in early 2000. "They weren't willing to sell just their software business. They wanted Microsoft to do a box that could combine the Xbox and the Dreamcast2."
Yet like a bad rerun, Sega kept coming back and getting audiences with Bill Gates. One of Sega's top messengers was Kay Nishi, a former Microsoft employee and the CEO of ASCII in Japan. Nishi had a very close friendship with Bill Gates. Whenever he came to town, he could get meetings on short notice with Gates. He used that influence to get Gates together with Sega's top executives, Isao Okawa and Shoichiro Irimajiri.
In some ways, Sega was appealing. Some Microsoft executives had their doubts about the feasibility of coming up with a truly killer application that would drive people to buy the console over other systems. Ed Fries, who had confidence in his own game group of 700 developers, opposed the Sega deal because he believed Microsoft could create its own hit games.
Irimajiri said Sega wanted Microsoft to make the Xbox compatible with the upcoming Dreamcast 2. Okawa also wanted the Xbox to run games made for the original Dreamcast.