Sega's newest video-game machine is supposed to learn from its mistakes. Can its maker do the same? 

Five years ago, Japan's Sega Enterprises Ltd. ruled the U.S. with one of the most-recognized brands among American youth and a 60% share of the U.S. video-game market. But sales of its last major video-game system, the Sega Saturn, flopped. Today, Sega's share of the U.S. video-game market is about 1%, its U.S. work force has shrunk to 300 from 1,000, and its top U.S. management has turned over almost entirely. 

Sega is plotting a comeback with a new machine, the Dreamcast, which it plans to launch in the U.S. on Thursday as its main weapon against now-dominant machines from Sony Corp. and Nintendo Co. 

But the Dreamcast launch is already clouded by problems similar to those that helped sink the Saturn. People familiar with the matter say Sega's U.S. managers have clashed repeatedly with Japanese company executives over strategies they consider misguided, such as an early plan to sell Dreamcast only via the Internetone that would have alienated many of the retailers Sega has worked hard to win back following the Saturn debacle. 

Those battles came to an abrupt head last month, when Sega fired its U.S. head, Bernard Stolar, a cult figure in the gaming community who was largely responsible for Sega's U.S. strategy. Sega officials declined to say why Mr. Stolar left. 

Until last month's shakeup, many in the industry believed that Sega had a good shot at recapturing its former glory. Sega's retailers, in fact, bubble with enthusiasm about the Dreamcast launch. Sega has already received advance orders from consumers for 300,000 Dreamcast machines, and several retailers plan to open their stores at 12:01 a.m. Thursday to accommodate the expected crowds. 

Still, some worry that Mr. Stolar's departure-Sega replaced him with Toshiro Kezuka, a former board member of the parent company - signals continuing turmoil that could sap Dreamcast's momentum. 

"This is their opportunity to get their foot back in the game big time," says Joseph Firestone, head of retailer Electronics Boutique Inc. "If they blow it, customers will never give them another chance, ever." 

Sega's up-and-down experiences in the U.S. show how quickly cross-cultural mismanagement can reverse a global business success story - and how hard it can be to recover lost ground. Sega's former U.S. executives trace many of its troubles to strategic missteps by its Japanese management, especially its autocratic former president, Hayao Nakayama, and its current chairman, Isao Okawa. Sega denies much, but not all, of that claim. Messrs. Okawa and Nakayama declined to comment for this article. 

"Sega's worst enemy isn't Sony or Nintendo," says one person familiar with Mr. Stolar's thinking. "It's Sega." 

Sega has certainly pulled out the stops to regain momentum with the Dreamcast, which was introduced last year in Japan. In a first for the game market, the Dreamcast includes a built-in modem for head-to-head play over the Internet. Sega has commissioned a $100 million advertising campaign for the machine, which sports souped-up graphics and "artificial intelligence," the feature that is supposed to let it learn from its own mistakes. 

The company also recast its management last year, kicking Mr. Nakayama upstairs to the newly created position of vice chairman - a position he held for a year before resigning to become a corporate adviser in June. Vice President Shoichiro Irimajiri, a charismatic former Honda Motor Co. executive, became president. Mr. Stolar had joined the company last year from Sony's game division to head the U.S. Dreamcast launch. 

People familiar with the situation say Mr. Stolar soon began falling out with Mr. Okawa, who took a more active role at the company after nudging Mr. Nakayama out of the limelight. According to these people, the pressure started to build on U.S. managers, who work out of San Francisco, after the Dreamcast's disappointing launch in Japan last year, when shortages of a key chip caused Sega to miss its shipment target of one million machines by roughly 300,000 units. Officials from Sega's Tokyo headquarters began spending more time at the U.S. office, these people say. The Japanese often second-guessed the U.S. managers' decisions in an increasingly frantic attempt to ensure the U.S. launch would be a success. 

Instead, the meddling from headquarters seemed to make matters worse. The volatile Mr. Stolar and Mr. Okawa clashed repeatedly over key issues, including launch timing, Sega's distribution plans, and compensation for the company's game-software developers. So heated were the disagreements that they sometimes culminated in shouting matches between Mr. Stolar and Mr. Okawa - arguments mediated by interpreters who scrambled to translate harsh words and unfamiliar phrases. 

Early on, Mr. Okawa hatched the idea of bypassing Sega's U.S. retail network and selling the Dreamcast directly over the Internet in hopes of jump-starting an online-gaming community, these people say. To Mr. Stolar, the notion was nuts, given how the Saturn debacle had alienated many of Sega's traditional retailers. Munehiro Umemura, a Sega spokesman in Tokyo, says Mr. Okawa never insisted on making the Dreamcast launch an Internetonly event, although the executive did ask employees to put "more effort" in that direction. 

Mr. Stolar won that argument, but didn't fare so well when executives of the Sega parent decided to award Japanese game developers much higher royalty payments than those offered to American developers, the people familiar with the situation say. They say the royalty for Japanese developers was higher even though the American developers did similar work. While such a disparity had existed during the Saturn era, it widened considerably for the Dreamcast, they say. The second-class treatment rankled a traditional Sega ally, Electronic Arts Inc., these people say. For the first time in years, EA has decided not to create games for Sega's new machine. 

"Bernie was adamant that Sega support the U.S. developer," says one person familiar with the matter. EA officials decline to comment. A representative for the company says the software maker continues to "evaluate" the Dreamcast platform. Mr. Umemura confirms that some software developers receive higher compensation than others, but says that merely reflects their track records and related factors, and has nothing to do with a developer's nationality. 

One of the last straws came just a few months ago, when Mr. Okawa proposed postponing the Dreamcast launch until next year, these people say. Mr. Stolar hit the roof; such a delay would cost Sega the vital Christmas season and sacrifice its lead over Sony Corp.'s PlayStation 2, which is expected in the U.S. next year. "I refuse to do that," Mr. Stolar bluntly told a room of parent-company officials, people familiar with the exchange say. The launch proceeded as planned. 

Many in the U.S. thought Mr. Stolar had patched things up with headquarters as the launch date neared. But on Aug. 11, a representative of Mr. Okawa informed Mr. Stolar that he was fired. While the U.S. unit insists that Mr. Stolar's departure will have "no effect" on Dreamcast sales, others aren't so sure. "This is going to confuse people," says Christian Svensson, editor of MCV, an industry journal in San Francisco. 

What's particularly poignant about the recent saga of the Dreamcast is its eerie resemblance to the problems that beset the Saturn several years ago. Instead of confronting Mr. Okawa, Sega's U.S. managers sparred with Mr. Okawa's hard-nosed protege, Mr. Nakayama; instead of Mr. Stolar, the top American was Tom Kalinske, a brash marketing executive who had previously helped revive the Barbie franchise at Mattel Inc. 

Gnomish and balding, Mr. Nakayama had worked for years in Sega's arcade business, a rough-and-tumble industry that in Japan was long associated with gamblers and gangsters. Once president, he quickly developed an autocratic management style, current and former Sega executives say. He would unilaterally set sales targets and product prices, overrule his subordinates - often without telling them - and publicly upbraid his managers in regular meetings. 

"He was the dictator of Sega," Mr. Irimajiri said in an interview last year, shortly after being named president. 

One of Mr. Kalinske's first acts was to persuade Mr. Nakayama to let him revamp Sega's ailing Genesis game machine, which he did by slashing prices and launching a $100 million marketing blitz in North America. By 1993, Sega overtook archrival Nintendo in the most important segment of U.S. video-game sales. 

The lead didn't last. Sega engineers were starting to design the Saturn, and Mr. Kalinske thought he had found the perfect graphics "engine" for it - an inexpensive 3-D chip from Silicon Graphics Inc. of Mountain View, Calif., that would add dazzling perspective and give players a sense of being "in" the game. Mr. Nakayama was unimpressed by a demonstration, and instead backed his Japanese engineers, who preferred hybrid of 2-D and 3-D chips from another supplier. 

Using those chips, however, pushed up the break - even cost of the machine to $390 - far too high, given that game machines typically retail for less than $200. Game programmers also hated the unwieldy architecture, which made development for the Saturn far more difficult than for the competing Sony PlayStation and the Nintendo 64. 

The Japanese executives "were making decisions for the U.S. market," says Mr. Kalinske, "and they did not know what they were doing." 

It got worse. Nintendo made a surprising comeback the following year, recapturing the market-share lead. With Sony's advanced PlayStation also waiting in the wings, Mr. Nakayama pressed his U.S. managers to steal Sony's thunder with an early U.S. launch for the Saturn. In the spring of 1995, Mr. Kalinske dutifully announced that the Saturn would be available immediately-but only in four national retailers, infuriating those left out. The spurned chains immediately called Sony to pledge their support for the PlayStation. 

"It was the best nonlaunch we ever had," recalls Steve Race, then head of Sony's PlayStation effort in the U.S. Mr. Kalinske says he argued for confining the launch to a handful of cities such as San Francisco and Los Angeles, but was overruled by Mr. Nakayama. 

Competition from Sony and Nintendo sent prices into free-fall and Sega's market share into a nosedive. In a desperate attempt to move stacks of unsold machines, Mr. Nakayama ordered up costly special promotions in which Sega gave away free games with each Saturn console. The financial losses only mounted. 

Stunned by the red ink, Mr. Irimajiri drew up a strategy to write off and dispose of the unsold inventory. "Mr. Nakayama's style was not to do that," Mr. Irimajiri says, adding that Mr. Nakayama ordered the U.S. unit to sell the unwanted machines anyway. "In such instances, I had great sympathy with Sega of America managers." 

Mr. Kalinske resigned in July 1996. Most of his managers wound up leaving, too. "Nobody could have succeeded marketing that thing," Mr. Kalinske says. 

Back in Japan, Sega's troubles were quickly reflected in its stock price, which plummeted by more than half between late 1995 and early 1998. The stock's slide spurred the long-quiescent Mr. Okawa - whose CSK Corp. is Sega's largest shareholder, with a 20% stake - to take a more active role in the company. In June 1998, Mr. Nakayama became vice chairman, clearing the way for Mr. Irimajiri to take the presidency, close down the Saturn business, and pave the way for the Dreamcast. 

Prior to his ouster, Mr. Stolar insisted that, this time, the U.S. team would get everything right. Early signs have been good: Sega will launch the Dreamcast in 15,000 U.S. stores at a price of $199 for the console, with 16 games available. The company anticipates sales of as many as onemillion units in the first six months after launch. The main ad campaign makes its debut Thursday during the annual MTV Video Music Awards in New York. A fleet of trucks will roll out, stopping at shopping malls, arcades and other venues to hand out Sega T-shirts and other memorabilia. 

"Nothing is going to stop us from going to the goal line," Mr. Stolar said in an interview on Aug. 6. "We're not going to make the same mistake twice." 

He lost his job five days later.