In the early 1980s, Sega Enterprises, Inc., then a subsidiary of the American conglomerate Gulf and Western, was one of the largest arcade game manufacturers active in the United States, with company revenues of $214 million by mid-1982. A downturn in the arcade business starting in 1982 negatively impacted the company, leading Gulf and Western to sell the North American manufacturing and licensing of its arcade games to Bally Manufacturing. The company retained its Japanese subsidiary, Sega Enterprises, Ltd., as well as Sega's North American research and development division. With its arcade business in decline, Sega Enterprises, Ltd. president Hayao Nakayama advocated that the company leverage its hardware expertise to move into the home console market in Japan, which was in its infancy at the time. Nakayama received permission to proceed. The first model to be developed was the SC-3000, a computer with a built-in keyboard, but when Sega learned of Nintendo's plans to release a games-only console, they began developing the SG-1000 alongside the SC-3000.
The SG-1000 was first released in Japan on July 15, 1983, at a price of JP¥15,000. It was launched on the same day that Nintendo released the Family Computer (Famicom) in Japan. Shortly after the launch of the SG-1000, Gulf and Western began to divest itself of its non-core businesses after the death of company founder, Charles Bluhdorn, so Nakayama and former Sega CEO David Rosen arranged a management buyout of the Japanese subsidiary in 1984 with financial backing from CSK Corporation, a prominent Japanese software company. Nakayama was then installed as CEO of the new Sega Enterprises, Ltd. Following the buyout, Sega released another console, the SG-1000 II, for ¥15,000. It features a few hardware tweaks from the original model, including detachable controllers. The SG-1000 II did not sell well, however, leading to Sega's decision to continue work on the video game hardware used for the system. This resulted in the release of the Sega Mark III in Japan in 1985.
Engineered by the same internal Sega team that had created the SG-1000, the Mark III is a redesigned iteration of the previous console. The CPUs in the SG-1000 and SG-1000 II are Zilog Z80As running at 3.58 MHz, while the Mark III, SC-3000—a computer version of the SG-1000—and Master System feature a Z80A running at 4 MHz. The Mark III and Master System also have a slot for Sega Card software without any need for the Card Catcher add-on that the SC-3000 and previous SG-1000 consoles required. According to Edge, lessons from the SG-1000's lack of commercial success were used in the hardware redesign of the Mark III, and the console was designed to be more powerful than the stock Famicom.
For the console's North America release, Sega restyled and rebranded the Mark III under the name "Master System", similar to Nintendo's own reworking of the Famicom into the Nintendo Entertainment System. The "Master System" name is one of several proposals Sega's American employees considered, and was ultimately chosen by throwing darts against a whiteboard, although plans to release a cheaper console similarly referred to as the "Base System" also influenced the decision. Sega Enterprises Chairman Isao Okawa endorsed the name after being told it was a reference to the competitive nature of both the video game industry and martial arts, in which only one competitor can be the "Master". The futuristic final design for the Master System was intended to appeal to Western tastes.
The Sega Mark III was released in Japan in October 1985 at a price of ¥15,000. Though featuring technically more powerful hardware than its chief competition, the Famicom, the Mark III did not prove to be successful at its launch. Difficulties arose from Nintendo's licensing practices with third-party developers at the time, whereby Nintendo required that games for the Famicom not be published on other consoles. To overcome this, Sega developed its own games and obtained the rights to port games from other developers, but they did not sell well. NEC later used the same strategy on some of Sega's games when developing games for the TurboGrafx-16. In preparation for the launch, Mark Cerny has stated that "pressure was very, very high", with a typical game being allotted only three months of development time.
After being restyled the "Master System", the console was released in North America in 1986 at a price of $200 (equivalent to $457 in 2018), including a multicart of the games Hang-On and Safari Hunt. Sega and Nintendo, which was similarly exporting the Famicom to the US as the Nintendo Entertainment System (NES), planned to spend $15 million in the fall and winter of 1986 to market their consoles; Sega hoped to sell 400,000 to 750,000 consoles in 1986. By the end of 1986, 125,000 Master System consoles had been sold, more than the Atari 7800's 100,000 but less than Nintendo's 1.1 million. As in Japan, the Master System in North America had a limited game library that was not as well received as the NES. Against Nintendo's licensing practices, Sega only had two third-party American publishers, Activision and Parker Brothers. By 1988, Nintendo commanded 83 percent of the North American video game market share. Sega claimed that "our system is the first one where the graphics on the box are actually matched by the graphics of the game", and marketing for the Master System was targeted at bringing home the arcade experience, but its marketing department was run by only two men, giving Sega a disadvantage in advertising. At this time, Sega sold the distribution rights for the Master System in the United States to Tonka, which did not have any previous experience with electronic entertainment systems. Some of Tonka's decisions with the Master System included blocking localization of several popular video games. Though the distributor of the console had changed, the Master System continued to perform poorly in the market. The console was re-released as the Master System in Japan in October 1987 for ¥16,800, but still sold poorly as did the Mark III. Neither model posed a serious challenge to Nintendo in Japan.
The European launch of the Master System occurred in 1987. It was distributed by Mastertronic in the United Kingdom, Master Games in France, and Ariolasoft in Germany. Mastertronic advertised the Master System as "an arcade in the home" and launched the system at £99 (equivalent to £274 in 2018). Advance orders from retailers were high, but Sega proved unable to deliver inventory until Boxing Day on December 26, causing many retailers to cancel their orders. As a result, Master Games and Mastertronic both entered financial crises and Ariolasoft vowed never to work with Sega again. Mastertronic had already sold a minority interest to Richard Branson and the Virgin group to enter the console business and now sold the remainder of the company to avoid bankruptcy. The newly rebranded Virgin Mastertronic then took over all European distribution in 1988. Virgin Mastertronic consequently focused marketing the Master System on ports of Sega's arcade games and positioning it as a superior video game alternative to the Commodore 64 and the ZX Spectrum home computers. As a result of this marketing and of Nintendo's less effective approaches in Europe, the Master System began to attract European-based developers. The Master System held a significant part of the video game console market in Europe through the release of Sega's succeeding console, the Mega Drive.
Brazil was also a successful market for the Master System, where the console was distributed by Tectoy. Launched officially in Brazil in September 1989, the Master System achieved success in the region. By the end of 1990, the Master System installed base in Brazil was about 280,000 units. The company also introduced a telephone service with tips for games, created a Master System club, and presented the program Master Tips during commercial breaks of the television show Sessão Aventura of Rede Globo. Sega's primary competition, Nintendo, did not officially arrive in Brazil until 1993, and were unable to compete. Tectoy claimed 80% of the Brazilian video game market.
Transition to Genesis and decline
The Master System II, a cost-reduced version of the Master System released in 1990.
Sega released the Mega Drive, a 16-bit video game console, in Japan on October 29, 1988. The final licensed release for the Mark III/Master System in Japan was Bomber Raid in 1989. During the same year, Sega was preparing to release the new Mega Drive, relabeled "Genesis", in North America. Displeased with Tonka's handling of the Master System, Sega reacquired the marketing and distribution rights to the Master System for the United States. In 1990, Sega released the remodeled Master System II, designed to be a lower-cost version of the console without the Sega Card slot. Sega promoted the new model itself, but the console still sold poorly in the region though Tonka was no longer involved with the Master System's marketing. In 1991, Nintendo entered into a consent agreement under United States antitrust law and was forced to abandon some of its licensing practices.  By early 1992, Master System production ceased in North America. By the time of its discontinuation, between 1.5 million and 2 million units had been sold in the United States, finishing behind both Nintendo and Atari, which controlled 80 percent and 12 percent of the market, respectively. The last licensed release in North America was Sonic the Hedgehog in 1991.
Contrary to its performance in Japan and North America, the Master System was eventually a success in Europe, where it outsold the NES by a considerable margin. As late as 1993, the Master System's active installed user base in Europe was 6.25 million units, larger than that of the Mega Drive's 5.73 million base that year. Combined with the Mega Drive, Sega represented the majority of the console user base in Europe that year. The Master System's largest markets in the region were France and the United Kingdom, which had active user bases of 1.6 million and 1.35 million, respectively, in 1993. The remodeled Master System II also proved to be successful and helped Sega to sustain the Master System's significant market share in Europe. More new releases would continue into the 1990s in Europe, including Sonic the Hedgehog 2, Streets of Rage 2, and Mercs.
Continued success in Brazil
The Master System has had continued success in Brazil, where new variations have continued to be released long after the console was discontinued elsewhere. As they are from the original 1989 manufacturer, Tectoy, this has resulted in the console's unusually long production lifespan. These variations include the Master System Compact and the Master System 3, though Tectoy has also received requests to remake the original Master System. In 2015, it was reported that the Master System sells around 150,000 units per year in Brazil, a level that holds its own against modern systems such as the PlayStation 4. By 2016, the Master System had sold 8 million units in Brazil. Because Tectoy continued to produce the Master System years after its cancellation, the console is considered the longest-lived in the history of video game consoles.
The Game Gear
was based on the Master System's architecture and shared many similarities
Developed under the name "Project Mercury" and designed based on the Master System's hardware, the Game Gear is a handheld game console. It was first released in Japan on October 6, 1990, in North America and Europe in 1991, and in Australia and New Zealand in 1992. Originally retailing at JP¥19,800 in Japan, US$149.99 in North America, and GB£99.99 in Europe, the Game Gear was designed to compete with the Game Boy, which Nintendo had released in 1989. There are similarities between the Game Gear and the Master System hardware, but the games are not directly compatible; Master System games are only playable on Game Gear using the Master System Converter accessory. A large part of the Game Gear's game library consists of Master System ports. Because of hardware similarities including the landscape screen orientation, Master System games are easily portable to the handheld. In particular, many Master System ports of Game Gear games were done by Tectoy for the Brazilian market, as the Master System was more popular than the Game Gear in the region.