Note here that by game, I am not including slot machines. As I mentioned last time, I believe that the first Sega-made slot machine was the "Sega Bell" or "777" of 1957.
With that in mind, here are the candidates I’ve found so far for the title of "first Sega arcade game."
Punching Bag (1962?) – This one was just what the name implies – a strength tester in which you punched a bag with all your might. It is VERY similar to American Mutoscope & Biograph’s Deliver the Punch/Punch a Bag (which Pinrepair dates to 1910) and Mills Novelty’s Bag Puncher (a.k.a. Reward Paying Punching Bag) of 1903 and 1926-30. Mills Bag Puncher was designed by Herbert S. Mills, who filed a patent on July 31, 1903. The game was released in 1926 with a cheaper, simpler cabinet. I don’t know if it was the first punching machine with a boxing-style punching bag or not. There were earlier punching bag machines, but they used a leather pad rather than a bag. There is also a current machine that appears to be an update of this game.
As for the Sega version, arcade-history.com, Segaretro.org, and Pinrepair.com all list it as a 1962 game, though they don’t list their source and they may all be using the same one. I have not found any contemporary evidence confirming the 1962 date. A flyer for the game can be found at TAFA and other sights, but it is from Sega Enterprises Ltd and thus must date from 1965 or later. I did find an article mentioning the game in the October 19, 1968 issue of Billboard, confirming that it was produced by Sega Enterprises. I do not know when they started producing it or for how long it was out of production before they started producing it again. If the 1962 date is correct, then the game must have been produced by Service Games prior to the merger, so some may not count it as "Sega’s" first arcade game, even if it was the first to bear the Sega brand name.
Space Ace (1962???) – Even less is known about this one. About the only information I found is from the brief write-ups on Pinrepair and segaretro (including photos), which only show that it was a space themed gun game. The date on this one is really uncertain. Pinrepair lists it as "early 1960s (exact date unknown)" while arcade-history says 1962. According to a form post at sonicretro, both Space Ace and Punching Bag used the "1962 Sega logo" but I don't know how long this logo was used (perhaps this is the source of the 1962 date?).
Skill Diga (1965??) - This was a crane game. Sega also produced a game called Super Skill Diga. Ashcraft and Snow's book Arcade Mania claims that Skill Diga was released in 1965. arcade-history lists both Skill Diga and Super Skill Diga as 1968. I don't think segaretro lists Skill Diga (I can't tell because the site is down right now) but I think it lists Super Skill Diga as 1968 - though a commentator on the site wrote " Sega Skill Diga is 1965; Super Skill Diga is 1968. These two need to be separated." I originally thought that they might be the same game but Super Skill Diga actually has a second button that allowed players to mix the prizes once per game.
Rifleman (1967?) - Another gun game. The player used a rifle to take ten shots at a paper target showing five bottles bearing bull’s-eyes. Swinging saloon doors would occasionally obscure the target and at the end of the game, the machine printed out a "score card" showing where the player’s shots landed. You can see a video about the game here. Pinrepair lists this game as 1967. The November 11, 1967 issue of Billboard reports that Sega showed both Rifleman and Periscope at the 1967 MOA show. That does not mean, however, that they released it that year. Note that the person in the video above claims that his machine was manufactured in 1968. He was also puzzled as to why it had English on the cabinet but used a 220-volt (or was it 240?) power supply. This would make sense if it was designed for US military bases overseas (though I thought that Japan used 100-volt power).
Periscope (1966 or March 1968?) - This was Sega's real breakout game and one of the most significant arcade games of the 1960s. Not only was it hugely popular in both Japan and the US, but (according to RePlay) it shattered "the American game operator’s reluctance to buy foreign-made equipment". IT was also allegedly the first arcade game to cost a quarter (at the time, pinball games cost a dime or three games for a quarter). Note, however, that Nutting's Computer Quiz, which was released in the US before Periscope, has also been described as the first game to cost a quarter. RePlay's Ed Adlum once called it first coin-op amusement machine to feature straight quarter play for a single game. RePlay, however also claimed that Periscope was the first arcade game to cost a quarter. Why the discrepancy? It could be that they were thinking of the 1966 release date for Periscope, but that seems unlikely. My guess is that Adlum did not consider Computer Quiz an "arcade" game since it was mostly sold to bars.
So when was Periscope released? Kent's Ultimate History says it was released in Japan in 1966 and that date has been repeated in a number of other sources. Cash Box magazine's equipment catalog listed it as a March 1968 game - a date also listed at Pinrepair.com. The March 1968 date, however, likely refers to its US release date. Unfortunately, I do not have a good source for Japanese release dates and Kent doesn't identify his source. It seems strange to me that Sega would have released the game in Japan in 1966 and waited until 1968 to release it in the US but maybe they (it WAS a very large game). In any event, I do not think Periscope was released in the US in 1966.
So what was the first Sega arcade game?
If we are talking about games bearing the Sega brand name, the leading candidate is Punching Bag (it almost surely wasn't Periscope). If we are talking about he first Sega-designed game released in the US, I'd guess it was Basketball, but that game was licensed to Midway, so it probably shouldn't count. If we are talking about the first game released by Sega Enterprises, it might be Periscope, but the evidence is unclear and I am not at all convinced that that is the case. If it WAS released in Japan in 1966 (and I am far from convinced that it was), it may have been beaten to the punch by Skill Diga and/or Basketball. In the US, it does not appear to have been released until 1968 and may have been preceded by Rifleman.