North American video game crash of 1983

The North American video game crash of 1983 (sometimes known as the video game crash of 1984 because it was in that year that the full effects of the crash became apparent to consumers) was the crash of the US video game market in the early 1980s. It almost destroyed the then-fledgling industry and led to the bankruptcy of several companies producing home computers and video game consoles in North America. The crash brought an abrupt end to what is considered the second generation of console video gaming in the English-speaking world. It lasted for about two years and during that interval, many business analysts of the time expressed doubts about the long-term viability of video game consoles. The video game industry was revitalized a few years later, mostly due to the widespread success of the Nintendo Entertainment System (NES), which was released in North America in 1985 and became extremely popular by 1987.

There were several reasons for the crash, but the main cause was oversaturation of the market with dozens of consoles and hundreds of mostly low-quality games. Hundreds of games were in development for the 1983 release alone, and this overproduction resulted in a saturated market without the consumer interest it needed.

Preface and cause

The American video game console crash of 1983 was caused by a combination of factors. Although some were more important than others, all played a role in saturating, and then imploding, the video game industry.

Flood of consoles and games

The second generation of video game consoles was the first era to be sustained by large libraries of interchangeable software. Without an established precedent, the industry was not prepared to take consoles to the next generation, and the long-term delay of Atari's own 7800 console left the industry with little to captivate consumers' hunger for the next big release. Also, the US market was flooded with literally dozens of consoles, giving consumers far too many choices. At the time of the US crash, there was a plethora of consoles on the market, including the Atari 2600, the Atari 5200, the Bally Astrocade, the ColecoVision, the Coleco Gemini, the Emerson Arcadia 2001, the Fairchild Channel F System II, Magnavox Odyssey², Mattel Intellivision (and its just-released update with several peripherals, Intellivision II), the Sears Tele-Games systems (which included both 2600 and Intellivision clones), the Tandyvision, the VTech CreatiVision, and the Vectrex. Each one of these consoles had its own library of games, and many had large third-party libraries. Likewise, many of these same companies announced yet another generation of consoles for 1984, such as the Odyssey3, and Atari 7800.^[1]

Adding to the industry's woes was a glut of poor titles from hastily financed startup companies. These games, combined with weak high-profile Atari 2600 games, such as the video game version of the hit movie E.T. the Extra-Terrestrial and an infamous port of the popular arcade game Pac-Man, seriously damaged the reputation of the industry. These games were also vastly overproduced, damaging Atari financially. Finally, Atari's market-leading 2600, now in its sixth year, was starting to approach obsolescence; most who wanted a system had now purchased one, and there was not yet a strong next-generation console available to take the place of the 2600.

Competition from personal computers

Until the late 1970s, personal computers had primarily been sold in specialty computer stores at a cost of more than US$1,000, which, factoring in inflation, was over US$2,500 as of 2007. However, by the early 1980s, many companies released PCs that could connect to a TV set and offered color graphics and improved sound. The first of these systems were the Atari 400 and 800, but many competing models vied for consumer attention. By 1982, the TI 99/4A and the Atari 400 both at $349 (both $772.50 in 2008 dollars), Radio Shack's Color Computer at $379 ($838.91 in 2008 dollars), and Commodore had just reduced the price of the Commodore VIC-20 to $199 and the C64 to $499 ($440-$1104 in 2008 dollars).^[2][3]

Because these and other home computers generally had more memory available, and better graphic and sound capabilities than a console, they permitted more sophisticated games and could also be used for tasks such as word processing and home accounting. Also, their games were often much easier to copy, since they came on floppy disks or cassette tapes instead of ROM modules (though many of them continued to use ROM modules extensively). The use of a writable storage medium also allowed players to save games in progress, a feature useful for the increased complexity of computer games, and one not available on the consoles of the era.

Commodore explicitly targeted video game players in its advertising by offering trade-ins toward the purchase of a Commodore 64 and suggesting that college-bound children would need to own computers, not video games.

Unlike most other computer manufacturers of the time, Commodore also sold its PCs in the same outlets as video game consoles, such as discount stores, department stores, and toy stores. Commodore’s vertical integration also allowed it to engage in aggressive discount pricing because its margins were much higher than those of Texas Instruments (TI), Coleco, or Atari. This was because Commodore’s MOS Technology, Inc. subsidiary actually manufactured many of its chips (notably the 6502 CPU). Some competing manufacturers also had to get their chips from this subsidiary, thus subsidizing Commodore for the chips they would then use to compete with it. Although this was a major factor in the ongoing PC price wars, some companies, such as Atari (who used the 6502 in Atari computers and video game consoles), were able to set up deals that allowed them to manufacture their own chips.

Timeline of the crash

The first sign of the coming disaster came from a company whose games were perceived to be high quality. Activision was co-founded by Atari programmers who left the company in 1979 because Atari did not allow credits to appear on the games and did not pay employees a royalty based on sales. At the time, Atari was owned by Warner Communications and the developers felt that they should receive the same recognition that musicians, directors, and actors got from Warner’s other divisions. After Activision went into business, Atari quickly sued to block sales of Activision’s products, but never won a restraining order and ultimately lost the case in 1982.

This court case legitimized third-party development and companies as ill-prepared as Quaker Oats (as division US Games) rushed to open video game divisions, hoping to impress both stockholders and consumers. Companies lured away each other’s programmers or used reverse engineering to learn how to make games for proprietary systems. Atari even hired several programmers from Mattel's Intellivision development studio, prompting a lawsuit by Mattel against Atari that included charges of industrial espionage.

Despite the lessons learned by Atari in the loss of its programmers to Activision, Mattel continued to try to avoid crediting game designers. Rather than reveal the names of Intellivision game designers, Mattel instead required that a 1981 TV Guide interview with them change their names to protect their collective identities. ColecoVision designers worked in similar obscurity, feeding more departures to upstart competitors.

Unlike Nintendo, Sega, Sony, or Microsoft in later decades, the hardware manufacturers in this era lost exclusive control of their platforms’ supply of games. With it they also lost the ability to make sure that the toy stores were never overloaded with products. Activision, Atari and Mattel all had experienced programmers, but many of the new companies rushing to join the market did not have enough experienced talent to create the games. Titles such as Chase the Chuck Wagon, Skeet Shoot, and Lost Luggage were examples of games that companies made in the hopes of taking advantage of the video game boom. While heavily advertised and marketed, these games were perceived to be of poor quality and did not catch on as hoped, further damaging the industry.

The established video game companies also played a significant role in the crash. When Atari issued its widely advertised ET game, it manufactured millions of units in anticipation of a major hit. Unfortunately, the game had been rushed to market after less than six weeks of development time. The game’s poor reputation spread quickly by word of mouth, and the story was picked up by newscasts that trumpeted ET as the first great bomb of the video game age.

Price war

At the same time as the gaming industry shakeup, a home-computer price war was occurring which also proved disastrous for some contenders in that industry. As the pioneering computer-book author and journalist David H. Ahl recounted in 1984:

Besides TI, personal-computer casualties included the Coleco Adam, the Timex-Sinclair line, and a number of other smaller players. Atari nearly went bankrupt and in 1984 was sold off by its parent company Warner Communications (now part of Time Warner). The purchaser was, ironically, Jack Tramiel, the founder of Commodore International. Commodore’s board of directors, keen on moving the company in a direction away from home computing, had forced him out. Thus, even the winner of the home computer war found it a Pyrrhic victory.

Immediate effect on the industry

The release of so many new games in 1982 completely flooded the market and most stores did not have, or decided not to allocate, sufficient space to carry all the new games and consoles. Inside Mattel, one Intellivision sales executive explained the problem: "Two years of products have been pushed into the channel in one year, and there’s no way to re-balance the system." As stores tried to return the surplus games to the new publishers, the publishers had neither new products nor cash to refund the retailers' money. Many publishers, including Games by Apollo and US Games (the ill-fated Quaker Oats games unit), quickly folded.

Unable to return the unsold games to defunct publishers after Christmas 1982, toy stores marked down the titles and placed them in discount bins and sale tables. Whereas the typical game of 1982 cost US$34.95 — US$77.36 in 2008 when adjusted for inflation — the discount bins quickly settled on the price of US$4.95 per game (about US$10.96 in 2008 when adjusted for inflation). By June 1983, the market for the more expensive games had shrunk dramatically and was replaced by a new market of rushed-to-market, low-budget games.

A massive industry shakeout resulted. Magnavox and Coleco abandoned the video game business entirely, and Imagic withdrew its IPO the day before its stock was to go public, and later collapsed. While the largest of the third-party cartridge makers, Activision, survived for several more years^[4] on personal-computer platforms (thanks to its then-legal ability to average its income and recover millions of dollars in past tax payments from the IRS), most of the smaller software development houses supporting the Atari 2600 closed.

Additionally, the toy retailers which controlled consumer access to games had concluded that video games were a fad, that the fad was over, and that the shelf space should be reassigned to different products. This led to many retailers refusing to have anything to do with video games for several years. This was the most formidable barrier that Nintendo ran up against when trying to market the US-branded Famicom in the US. This opposition to video games by retailers was directly responsible for causing Nintendo to make such changes as calling the system an "Entertainment System" rather than a "console," using terms such as "control deck" and "Game Pak," as well as including a toy robot called ROB to convince toy retailers to allow it in their stores.^{[5] [6]}

Long-term effect on the industry

The American video game crash had two long-lasting results. The first result was that dominance in the home console market shifted from the United States to Japan. When the video game market recovered by 1987, the leading player was Nintendo’s NES, with a resurgent Atari battling Sega (a Japanese company originally founded by an American, David Rosen) for the number two spot. Atari never truly recovered. It never managed to match the success of its 2600 console, and finally stopped producing game systems in 1996 after the failure of the Atari Jaguar. Japanese control of the North American market continued for most of the next two decades.

A second, highly visible result of the crash was the institution of measures to control third-party development of software. Using secrecy to combat industrial espionage had failed to stop rival companies from reverse engineering the Mattel and Atari systems and hiring away their trained game programmers. Nintendo, and all the manufacturers who followed, controlled game distribution by implementing licensing restrictions and a security lockout system. Would-be renegade publishers could not publish for each others’ lines, as Atari, Coleco and Mattel had done, because in order for the cartridge to work in the console, the cartridge had to contain the appropriate key chip for the lock inside the console, and the publisher had to also acknowledge its license to Nintendo in the copyright notices. If no key chip was present or if the key chip did not match the lock inside the console, the game would not work. Although Accolade achieved a technical victory in one court case against Sega, challenging this control, even it ultimately yielded and signed the Sega licensing agreement. Several publishers, notably Tengen (Atari), Color Dreams, and Camerica, challenged Nintendo’s control system during the 8-bit era. The concepts of such a control system remain in use on every major video game console produced today, even with fewer “cartridge-based” consoles on the market than in the 8/16-bit era. Replacing the security chips in most modern consoles are specially-encoded optical discs that cannot be copied by most users and can only be read by a particular console under normal circumstances.

Nintendo reserved the lion’s share of NES game revenue for itself by limiting most third-party publishers to only five games per year on its systems. It also required all cartridges to be manufactured by Nintendo, and to be paid for in full before they were manufactured. Cartridges could not be returned to Nintendo, so publishers assumed all the risk. As a result, some publishers lost more money due to distress sales of remaining inventory at the end of the NES era than they ever earned in profits from sales of the games. Nintendo portrayed these measures as intended to protect the public against poor-quality games, and placed a golden seal of approval on all games released for the system. Most of the Nintendo platform-control measures were adopted by later manufacturers such as Sega, Sony, and Microsoft.

Effect on other video game markets worldwide

In Europe, the early years of personal computing (1981–1985) were spearheaded by the very aggressive marketing of inexpensive home computers with the theme “Why buy your child a video game and distract them from school when you can buy them a home computer that will prepare them for college?”^[7] Marketing research for both the gaming and the home-computer industries sides tracked the change as millions of consumers shifted their intention to buy choices from game consoles to low-end computers that retailed for similar prices while still playing comparable games.

By 1982, computers such as the Commodore 64 and Sinclair ZX Spectrum had launched in Europe and were selling extremely well there, dominating the European games market and growing throughout 1983/1984. The significantly lower price of computer games (some of which cost just 1% of the price of a computer) strengthened this domination and helped quickly create a mass computer games market. By the time of the 1983 North American console crash, the European video games industry was mostly computer-based and most games were made by European publishers. This allowed the European market to continue to thrive despite the crashing American console market.

In Japan, both the hardware and software portions of the gaming industry were separate from the North American or European markets. Thus, events that related to the American or European gaming industries had little to no effect on the Japanese consumer.

References

Bibliography

• DeMaria, Rusel & Wilson, Johnny L. (2003). High Score!: The Illustrated History of Electronic Games (2nd ed.). New York: McGraw-Hill/Osborne. ISBN 0-07-222428-2.

External links

• Article at The Dot Eaters, a chronicle of the Great Videogame Crash
• The Golden Age of Video Game Arcades (a 200-page story contained within Twin Galaxies' Official Video Game & Pinball Book of World Records) by Walter Day (1998), ISBN 1-887472-25-8
• Classic Gaming Expo site Biographies and history of the era
• Official IntelliVision History Site by the original programmers
• The History of Computer Games: The Atari Years Written by Chris Crawford, a game designer at Atari during the crash
• Detailed C64 Chronology Events & Game release dates (1982-1990)
• Armchair Arcade discusses the crash