Saturday, October 10, 2015

The Ultimate (So-Far) History of Gremlin Industries Part 3

Before I jump into today's post, I wanted to mention a book I recently read that had some additional info on Nasir Gebelli, including why he left Sirius and why Gebelli Software failed. It is 1985's Software People by Broderbund co-founder Doug Carlston. If you have any interest in computer games of the 1970s and early 1980s, I highly recommend it.  have updated my earlier post on Nasir Gebelli with this new info.

Speaking of computer games, another source you need to check out if you haven't already is Jimmy Maher's outstanding blog "The Digital Antiquarian" ( It is one of my two favorite blog's on video game history. It mostly concentrates on interactive fiction and other games with a story/interactive element, but it also dives into the general history of various publishers. It is generally well researched and very well written.

And while we're on the subject, my other favorite video game history blog is Alexander Smith's "They Create Worlds" ( This one takes a much broader approach, covering all three major segments of the video game industry (coin-op, home, and computer) as well as background information on the various threads that led to the industry's creation (i.e. the history of computers in general). Alex has recently started a podcast that is also well worth listening to.

On to today's post:

In the last two posts, I have reviewed the early history of Gremlin Games. When we left off, they were on the verge of being purchased by Sega. Before we look at the purchase, let’s backtrack a bit and look at some Sega history. In a series of earlier posts, I recounted the history of Sega’s predecessors (Service Games and Rosen Enterprises). After Sega was formed, the company had a long history in Japan but delving into that would take us too far off course. Instead, I will concentrate on Sega’s early attempts to enter the US market.

Cracking the US Market

In the late 1960s, Sega dominated the Japanese coin-op industry with relative ease, success in America came much more slowly. The biggest reason was probably the prevalence of piracy. Sega exported a number of games to America between 1966 and 1970 and most were initially successful. The success, however, never lasted. Time and again Sega would conduct months of research before introducing a game only to see their competitors build similarly-themed knock-offs (Midway’s S.A.M.I. for example, was basically the same game as Missile). In addition, the U.S. companies often undersold Sega (Rosen 1975). This was especially easy to do since domestic manufacturers could avoid the costs Sega incurred shipping their games from Japan to the U.S. (not to mention that they did not have to pay for R&D and that some of the copycat games were of less-than-stellar quality and thus cheaper to manufacture). After a disastrous experience of this kind with Jet Rocket, Sega pulled out of the U.S. market entirely. According to David Rosen, however, the "Jet Rocket fiasco" (as he called it) was not the primary reason. In Japan, the company’s arcade and amusement casino business was thriving and they did not have time to devote to the America market, which was an insignificant part of Sega’s total volume anyway (Rosen 1975). In any event, the company’s exit from the U.S. market was not to last long.

Going Public – Gulf + Western Buys Sega

After the success of Periscope, Rosen and his partners began to think about taking their company public, an unprecedented move for an American in Japan. It would have been the first time a coin-op company went public in Japan as well as the first time an American company of any kind did so after World War II. Rosen wanted to go public by acquiring another company and merging into his own. Sega's investment banker, Kidder-Peabody, suggested the opposite – find a company that might be interested in acquiring Sega. In 1969 and early 1970, Rosen and his partners sold 80% of the company to Gulf + Western Industries, though Rosen remained as CEO. Started in 1934 as Michigan Bumper Company, Gulf + Western went on to become the very definition of the word conglomerate (in Mel Brooks Silent Movie it was referred to as Engulf and Devour). Among the companies and brands it owned in the 1970s were Paramount Pictures, Simon & Schuster Publishing, Dutch Master Cigars, Paper Maid, Bohm Metals, Eagle Signals, and No-Nonsense pantyhose. Products made by these companies included food and agricultural products, tractors, air-conditioning equipment, books, movies, metal products, business machines, cables and connectors, musical instruments, public safety systems, wax museums, shoes, belts and the list goes on (and on, and on...). In its 1974 annual report, the list of subsidiaries takes up 9½ pages and includes almost 300 companies. Gulf + Western’s purchase of Sega would add yet another product line to its ever-growing list. One product that Gulf + Western did not make, however, (or want to) was gambling equipment. After acquiring Sega, they discontinued its slot machine line and, according to legend, Sega threw its slot machine molds into the Bay of Tokyo and began concentrating on arcade games.

Sega Enterprises, Inc.

Meanwhile, in 1974, a new corporate entity called Sega Enterprises, Inc. appeared on the scene, though it happened in a roundabout manner that only an accountant could understand. At the time, Gulf + Western, in partnership with David Rosen, was trying to establish a conglomerate in the Far East similar to Gulf + Western, with Sega as a subsidiary. When that effort failed, they decided to spin off Sega into a separate US company headed by Rosen (Kent 2001). One of Gulf + Western’s many holdings was a cosmetics company called the Polly Bergen Company, which they owned a 53.5% interest in via another subsidiary (naturally) called Consolidated Brands. By 1973, Polly Bergen was losing money and in March 1973 Gulf + Western sold its cosmetics business to Faberge, leaving Polly Bergen with no product line whatsoever. In March 1974, Gulf + Western transferred its Sega Enterprises, Ltd. subsidiary to the Polly Bergen Company. Then, on March 25, it effected a one-for-ten reverse stock split and acquired Polly Bergen for 1.7 million shares of stock, increasing its ownership of the company to 95%. The same day, they changed its name from The Polly Bergen Company to Sega Enterprises, Inc. with Sega Enterprises, Ltd. (Sega’s Japanese operations) as a subsidiary. (Annual Reports) While I am certainly no business expert, my guess (and that’s all it is – a guess) is that the reverse stock split was a way for Sega to increase its ownership of Polly Bergen by diluting that of any Polly Bergen Co itself or any other entities.

(Re)Entering the US Market: Sega of America 1975-77

In 1975, Sega decided to give the U.S. market another go. This time, hoping to avoid the problems that had led them to abandon the market earlier, they decided to build the games in America rather than shipping them from Japan. It seems that they initially tried to accomplish this through acquisition. Early in the year, Sega agreed in principle to acquire Seeburg’s Williams Electronics division but the deal was cancelled in the summer and in July, Sega opened its first U.S. manufacturing facility – a 50,000-square-foot plant in Los Angeles. At the 1975 MOA show, Sega debuted Bullet Mark, its first game manufactured in the US. A joint R&D effort between the US and Japan, Bullet Mark was a two-piece video gun game where one or two players used tommy guns to blast away at an oddly disparate assortment of targets (balloons, tanks, pirates, and jet fighters) (Rosen 1975). The guns featured a recoil effect for added realism and Sega later updated the game with new features like disappearing targets, machine gun sounds, and an IC containing new targets. The game arrived too late in the year, however, to have much of an impact on Sega’s bottom line (even if it had arrived earlier, it might not have had much of an effect as the game suffered from quality issues and its large size made it impractical for many locations).

In 1976 came more new video games. Tracer was a smaller, one-piece version of Bullet Mark, with different (and more sensible) targets (helicopters, submarines, bull’s-eyes, and jets). Road Race and Moto-Cross were driving games (automobile and motorcycle respectively) featuring a semi-first-person, behind-the-back perspective (itself somewhat unusual for the time). The latter featured motorcycle handlebar controls that vibrated after a collision as well as recorded sound effects on an 8-track tape. In the summer, Sega took advantage of Gulf + Western’s Paramount subsidiary and rebranded the game as Fonz, with cabinet graphics featuring the likeness of Henry Winkler of Happy Days (a Paramount property) fame. It was perhaps the first example of a celebrity-licensed video game. Sega even sponsored a "Ride with the Fonz" promo, cooked up by sales director Pat Karns (formerly of Atari). Participating arcades were given advertising posters and banners as well as Fonz T-shirts and free signed photos of Winkler to give as prizes and (hopefully) lure new players into the arcade (RePlay 12/76; 1/77). Tic Tac Quiz bore more than a passing resemblance to another TV property – Hollywood Squares (though the game show was produced by Filmways Television, not Paramount). Players agreed or disagreed with facts that appeared on the screen. If they were right, they got to choose where to put their X or O. The game shipped with 2,500 "questions" stored on a replaceable tape (Sega later offered a 1,500-question sports trivia tape).

Sega-Vision (and the Madman)

Sega also continued to branch out into other areas. In June, they acquired Muntz Manufacturing Inc. – a manufacturer of widescreen projection TVs. The company had had been founded by Earl "Madman" Muntz, a high school dropout who made a fortune selling cars, TVs, and stereos via his hyper-kinetic "Madman" persona. Muntz opened his first used car lot at age 20 and went on to become perhaps the most famous used car salesman in the country through a combination of publicity stunts (he once promised to smash a car to pieces on camera with a sledge hammer if he didn’t sell it by the end of the day) and a series of over-the-top TV and radio commercials. Bob Hope and Jack Benny incorporated him into their comedy routines and at one time his used car lots were the seventh most popular tourist attraction in Southern California. Underneath Muntz’s manic personality, however, was a shrewd businessman and a talented engineer. In a practice that came to be called "Muntzing," he would strip down complicated electronic devices to their bare essentials then sell them at a reduced price (he was the first to offer televisions that sold for under $100). Muntz also developed a 4-track car stereo called the Stereo-Pak that made him another fortune and led directly to the 8-track tape. After a fire damaged his offices, Muntz closed his Stereo-Pak business and turned his focus back to television. Taking a 15-inch Sony receiver, he added a mirror and a lens and projected the image onto a 50-inch screen, then housed the whole thing in a wooden console creating one of the earliest widescreen projection TVs. (New York Times 6/21/87; Erskine 2006; Rasmussen 2007)

One company that took notice was Sega, who was certain that the widescreen TV market was ready to explode. In addition to their use in homes, the sets could be installed in restaurants and hotels. Sega was also convinced that there was an untapped market for the devices in schools and corporations, where they could be used as a training aid. They later promoted their use in arcades for use in gaming tournaments. In June 1976, Sega purchased Muntz Manufacturing and began to develop its own widescreen TV, called Sega-Vision. In March 1977 they opened a Sega-Vision retail outlet in Los Angeles. Unfortunately, the world did not share Sega’s vision and did not buy its Sega-Vision. The anticipated market explosion did not happen (at least not in the late 1970s) and in mid-1978 Sega suspended production of the Sega-Vision. (Annual Reports; Play Meter 9/76)

Sega Centers

Sega’s U.S. arcade operations were much more successful. Not surprisingly, given its extensive experience operating arcades in Japan, expanding into arcade ownership was a major priority in Sega’s plan for competing in the U.S. market. The key was the family-oriented mall location. With the mall increasingly becoming the hang-out spot of choice for young people across America, mall owners were offering more activities outside of shopping (including movies, restaurants, arcades etc.) to take advantage of the new opportunity (what Sega called, in typically bloodless corporate-ese, "short-time-span entertainment").

Sega started in July 1975 by purchasing 50% of the Kingdom Of Oz Company, which operated about 70 arcades in shopping malls throughout California. They transformed six of them into Sega Centers – a chain of company-run arcades that Sega hoped would match its success in Japan. Rather than just opening a location and hoping kids would wander in, however, Sega aggressively promoted Sega Centers with tournaments, advertising, and other marketing tools. They also conducted extensive research into the playing habits and demographics of their clientele. In the summer of 1978, for instance, they ran a promotion offering free prizes to those who filled out a survey but the real purpose was to gather information on players’ likes and dislikes. Sega’s arcades were the only segment of their U.S. operations that turned a profit in 1978 and revenues for arcade operations rose 50% over the previous year. (Annual Reports)

Meanwhile, Back at Gremlin

And what about Gremlin? By the end of 1977, Gremlin had grown to almost 200 employees, but things were not all well. The wall game market was collapsing (again) and the computer division was doing poorly (it would be shut down in 1978). Gremlin’s video games were selling well, but none had matched the success of its initial effort, Blockade. Ultimately, however, sales may not have been the real problem.

[Gene Candelore] We were growing so rapidly we couldn’t sustain the cash flow… [We were growing at] something like 300% a year. Then there was a very bad winter. The transformers in our monitors were coming out of Chicago and Canada. With the bad winter that they had our supplies coming in were being held up and the games that we did produce…were caught in snow storms and they were sitting in Denver, and Kansas City, and St. Louis and not getting to our distributors. So on one hand we didn’t have any supply to build any more games and on the other hand we weren’t getting any income because our games weren’t getting into the hands of distributors. So that one winter really took us right down. We survived…but the next winter was the same thing. The second winter almost put us under, we almost went bankrupt. So we tightened up our belts and started working again so when Sega came to us and they were looking to acquire someone it was just a perfect fit at the time. (Candelore 1998-2002)

In September 1978, Gremlin got a new lease on life and a new corporate owner when they were purchased by the Japanese giant Sega, a company that was experiencing problems of its own.

[Gene Candelore] Sega had started a factory up north and over a period of two years they lost about $5 million. So, rather than trying to start a factory up and get into microprocessors, they decided, "Let’s buy the technology." (Candelore 1998-2002)

Sega Acquires Gremlin

So far, Sega’s plan for U.S. domination had not gone very well. In fiscal year 1977, Sega actually lost almost $800,000 overall and its American arm was responsible for almost all of it. Sega-Vision TVs were not selling and many operators were reluctant to take a chance on a new game in the midst of an industry downturn. As a result, Sega released just two new games in the American market in fiscal year 1978. If Sega was going to compete in the U.S. market they needed to do something – and fast. On September 29, 1978 they did just that when they acquired Gremlin Industries and began producing video games under the Gremlin/Sega name. (San Diego Union 8/9/78; Annual Reports; RePlay 10/78; Play Meter 9/1/78; 11/15/78).

The effects of the merger were not immediately reflected in Gremlin’s product line, however. At the 1978 AMOA show in November, they debuted three games and two of them were anything but revolutionary: Frogs, Fortress, and Gee Bee. Frogs cast the player in the role of the titular amphibian trying to spear insects (including an elusive dragonfly) with its tongue while avoiding falling off its lily pad. In Fortress, the player defended a castle against cannonballs fired from ships. While almost completely forgotten today, Fortress did have some innovative features - at least for Gremlin. Like most early video games, and all of Gremlin's previous games, Fortress was a timed game, but if the player got to the end of the time limit with part of his fortress remaining, they could earn extended playtime in which the enemy pirates were more aggressive. The feature, which had already been introduced in games like Midway's Sea Wolf, gave players at least the illusion that they could play forever. The game also incorporated a lesson Hauck had learned from Blockade. When playtesting the game, Hauck noted a mother and daughter who adopted an unusual play style.

[Lane Hauck] [They] would immediately head for each other on just the shortest path, and then they'd hit, hear the explosion sound, and laugh their heads off. Then they'd put in a quarter in do it again. (DeWyze 1982)

Hauck was about to approach the pair and tell them that they must not have read the instructions when he realized "Who am I to tell them not to put money in?" (DeWyze 1982). He decided that, in the future, he would try to play for unconventional play. He put this idea to use in Fortress. The game featured three cannons and Hauck figured that somebody would decide to get two additional players and put on each cannon.

[Lane Hauck] We want the player to feel that he'd figured something out and is really pulling something on us. Anything to get those next quarters. Discovering's an important thing in a game. For the macho arcade player you want to have some things that aren't laid right out. (DeWyze 1982)

On the other hand, despite the innovations, both Fortress and Frogs featured the same blocky, black-and-white graphics of earlier games. The one game that did look promising, Gee Bee (a video pinball game) was licensed from Namco. On the other hand, the ink was still barely dry on the Gremlin merger and its effects would not really be felt until 1979. When they did, things would change at Sega and in a big way. Meanwhile, in San Diego, Gremlin’s crosstown rival was introducing a major change of its own.
Aside from the sources mentioned above and in parts 1 and 2, additional sources include:

* Sega Inc Annual and 10-K reports
* Steven Kent's Ultimate History of Video Games
* An interview with David Rosen that appeared in the October 1975 issue of RePlay
Chris Erskine. 2006. And the Pitch is…Wild. Los Angeles Times. June 21.
* Cecilia Rasmussen. 2007. An L.A. Legend You’ve Never Seen or Heard. Los Angeles Times. December 16.


1 comment:

  1. Got that tune in my head now, thanks a lot!