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The North American video game crash was a massive contraction of the video game industry that occurred from 1983 to 1985. Revenues that had peaked at around $3.2 billion in 1983 fell to around $100 million by 1985. The crash was a serious event that brought an abrupt end to what is considered the second generation of console video gaming in North America. The crash almost destroyed the then-fledgling industry and led to the bankruptcy of several companies producing home computers and video game consoles in North America. It lasted about two years, and 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 had become extremely popular by 1987.[1]
There were several reasons for the crash, but the main cause was supersaturation of the market with hundreds of mostly low-quality games which resulted in the loss of consumer confidence.
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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.
At the time of the U.S crash, there were numerous consoles on the market, including the Atari 2600, the Atari 5200, the Bally Astrocade, the ColecoVision, the Coleco Gemini (a 2600 clone), the Emerson Arcadia 2001, the Fairchild Channel F System II, the Magnavox Odyssey2, the Mattel Intellivision (and its just-released update with several peripherals, the Intellivision II), the Sears Tele-Games systems (which included both 2600 and Intellivision clones), the TandyvisioN (an Intellivision clone for Radio Shack), 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.[2]
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, seriously damaged the reputation of the industry. Finally, Atari's market-leading 2600, then in its sixth year, was starting to approach saturation.
Until the late 1970s, microcomputers had primarily been sold in specialty computer stores at a cost of more than $1,000 USD ($3400 in 2010). However, by the early 1980s, many companies released a new class of computer, the home computer 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 were both at $349 ($800 in 2009), Radio Shack's Color Computer sold at $379 ($800 in 2009), and Commodore had just reduced the price of the Commodore VIC-20 and the Commodore 64 to $199 ($400 in 2009).[3][4][5]
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.
In a strategy that directly affected its home computer arch-rival Atari, 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.
Activision was 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.[6] This court case legitimized third-party development, encouraging companies such as Quaker Oats (with their US Games division) to rush 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 experience and talent to create the games. Titles such as Chase the Chuck Wagon (about dogs eating food, bankrolled by the dog food company Purina), 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.
A core cause of the crash was two high-profile titles for the Atari 2600 that were disasters. In 1981, Atari attempted to take advantage of the craze following the arcade game Pac-Man by releasing a version for the Atari 2600. However, development was rushed so as to have the game out in time for the 1981 Christmas season. Although the game managed to sell well in terms of absolute numbers, Atari had grossly overestimated the number of sales it would generate. Critics and gamers universally panned the game as being nothing like the lively, colorful original. In the end, Atari only sold a little over half the number of cartridges it produced. Production cost overruns combined with the costs incurred with a big marketing campaign for the game resulted in huge losses for Atari.[7]
The following year, Atari issued its widely advertised E.T. game. Once again, it manufactured millions of units in anticipation of a major hit. Concerned about making the holiday season, Atari again rushed the game to market quickly, after a mere six weeks of development time. The end result was a disaster and it is widely considered to be one of the worst video games ever. To clear their inventory, Atari eventually ended up burying the unsold copies in a landfill in New Mexico. Combined with the high costs for the movie license, E.T. became another financial disaster for Atari. Atari was sold two years later as the crash impacted upon the industry.
The release of so many new games in 1982 flooded the market. Most stores had insufficient space to carry new games and consoles. As stores tried to return the surplus games to the new publishers, the publishers had neither new products nor cash to issue refunds to the retailers. Many publishers, including Games by Apollo and US Games, 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. 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. Imagic withdrew its IPO the day before its stock was to go public; the company later collapsed. While the largest of the third-party cartridge makers, Activision, survived for several more years[8] on personal-computer platforms (thanks to the 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 fad, they assumed, had ended, and the shelf space would be reassigned to different products; as a result, many retailers ignored video games for several years. This was the most formidable barrier that confronted Nintendo, as it tried to market its Famicom system in the US. Retailers' opposition to video games was directly responsible for causing Nintendo's branding its product an "Entertainment System" rather than a "console", using terms such as "control deck" and "Game Pak", as well as producing a toy robot called R.O.B. to convince toy retailers to allow it in their stores.[9][10]
The sales of home video games had dropped considerably during this period, from $3 billion in 1982 to as low as $100 million in 1985, leading to bankruptcy for many game companies at the time. Following the release of the Nintendo Entertainment System in 1985, the industry began recovering, with annual sales exceeding $2.3 billion by 1988, with 70% of the market dominated by Nintendo.[11]
The North 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 1985, the leading player was Nintendo's NES, with a resurgent Atari battling Sega's Master System for the number-two spot soon after. By 1989, home video game sales in the United States had reached $5 billion, surpassing the 1982 peak of $3 billion during the previous generation. A large majority of the market was controlled by Nintendo, whose NES had sold over 30 million units in the United States by 1989, exceeding the sales of other consoles and personal computers by a considerable margin.[12] While Sega would later rival Nintendo's success with the Mega Drive/Genesis, Atari never truly recovered and could not match the success of its competitors or its own 2600 console; it finally stopped producing game systems in 1996 after the failure of the Atari Jaguar.
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 NES, 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.
Accolade achieved a technical victory in one court case against Sega, challenging this control, even though 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 by producing unlicensed NES games. 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 a large part of NES game revenue for itself by limiting most third-party publishers to only five games per year on its systems (some companies tried to get around this by creating additional company labels like Konami's Ultra Games label). 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.
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 university?"[13] Marketing research for both the gaming and the home-computer industries 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 BBC Micro, Atari XL, 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 and 1984. The significantly lower price of computer games (some of which cost just 1% of the price of a computer, due to being stored on inexpensive cassette tapes or floppy disks rather than the ROM chips contained in the plastic cartridges of consoles) strengthened this domination and helped quickly create a mass computer games market. By the time of the 1983 North American crash, the European video game industry was mostly computer-based and most games were made by European publishers. This allowed the European market to thrive despite the crashing American market.
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