North American video game crash of 1983
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The video game crash of 1983, also known as Atari shock in Japan, was a massive recession of the video game industry that occurred from 1983 to 1985. Revenues had peaked at around $3.2 billion in 1983, then fell to around $100 million by 1985 (a drop of almost 97 percent). 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 the region, including the fastest-growing U.S. company in history at that point, Atari. It lasted about two years, and many business analysts of the time expressed doubts about the long-term viability of video game consoles. The North American video game Console industry recovered a few years later, mostly due to the widespread success of the Nintendo Entertainment System (NES), which was soft launched in New York City in late 1985 and had become extremely popular in North America by 1987.
There were several reasons for the crash, but the main cause was saturation of the market. The full effects of the industry crash would not be felt until 1985.
Causes and factors
The North 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.
Flooded console market
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 Odyssey 2, 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 of these consoles had its own library of games produced by the console maker, and many had large libraries of games produced by third-party developers. Likewise, many of these same companies announced yet another generation of consoles for 1984, such as the Odyssey3, and Atari 7800.
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 Pac-Man and the video-game version of the 1982 hit movie E.T. the Extra-Terrestrial, seriously damaged the reputation of the industry. Atari's market-leading 2600, then in its sixth year, was starting to approach saturation and its 1977-era design was showing serious hardware limitations. Its 128 bytes of RAM, 160x192 graphic resolution and 1.19 MHz MOS Technology 6507 processor were no match for a desktop PC.
In November 1982, Atari attempted to counter an exodus to rival manufacturers' consoles by launching the Atari 5200 as a stripped-down version of the Atari 400/800 desktop PC hardware. The 5200 console would not directly run Atari 2600 cartridge games; it was also incompatible with Atari's 400/800 desktop computer platform and was discontinued less than two years after launch. A proposed Atari 7800 was 2600-compatible, but its 1984 launch was shelved when Warner split up Atari. The 7800 console was introduced in 1986, too late to turn around the company's fortunes.
Competition from home computers
The first microcomputers such as the Altair 8800 and Apple I were marketed to a niche of electronics hobbyists as most required assembly from a kit. In 1977, pre-assembled machines with BASIC in ROM became available, including the "Trio of '77": the Apple II, Commodore PET, and TRS-80 Model I. The latter two retailed for under $1,000, but lacked game joysticks and high-resolution color video. Third-party developers created games for all of these platforms. The TRS-80 benefited from Radio Shack's retail stores, which displayed computers and accessories locally in an era where many personal computers were mail-ordered from manufacturers.
In 1979, Atari unveiled the Atari 400 and 800 computers, built around a chipset originally meant for use in a game console, and which retailed for the same price as their names. In 1981, IBM introduced the IBM 5150 PC with a $1,565 base price, while Sinclair Research introduced its low-end ZX81 microcomputer for ₤70. By 1982, new desktop computer designs were commonly providing better color graphics and sound than game consoles and personal computer sales were booming. The TI 99/4A and the Atari 400 were both at $349, Radio Shack's Color Computer sold at $379, and Commodore had just reduced the price of the Commodore VIC-20 to $199 and the Commodore 64 to $499.
Because home computers generally had more memory and faster processors than a console, they permitted more sophisticated games. They could also be used for tasks such as word processing and home accounting. Games were easier to duplicate, since they could be packaged as floppy disks or cassette tapes instead of ROM modules (though some cassette-based systems retained ROM modules as an "instant-on" option). This opened the field to a cottage industry of third-party software developers. Writeable storage media allowed players to save games in progress, a useful feature for increasingly complex games which was not available on the consoles of the era.
Dan Gutman, founder in 1982 of Video Games Player magazine, recalled that "As the first wave of the personal computer boom started, the video games market began to taper off. People asked themselves, 'Why should I buy a video game system when I can buy a computer that will play games and do so much more?'" Commodore explicitly targeted video game players by offering competitive upgrades, where rival systems could be traded for a discount toward the purchase of a Commodore 64. Commodore's ownership of chip fabricator MOS Technology allowed manufacture of integrated circuits in-house, so the VIC-20 and C64 sold for much lower prices than competing home computers. This contributed to a ruinous price war between rival, incompatible platforms. Atari and Texas Instruments were squeezed out of the desktop market. Radio Shack, less vulnerable as it owned a retail distribution chain, abandoned its proprietary lines in 1991  to embrace the IBM PC standard. Many European and Japanese computer manufacturers chose to avoid the saturated U.S. market, hence the North American absence of computers like the MSX and Amstrad CPC.
By 1983, Gutman wrote, "Video games were officially dead and computers were hot". He renamed his magazine to Computer Games in October 1983, but "I noticed that the word games became a dirty word in the press. We started replacing it with simulations as often as possible". Soon "The computer slump began ... Suddenly, everyone was saying that the home computer was a fad, just another hula hoop". Computer Games published its last issue in late 1984. In 1988, Computer Gaming World founder Russell Sipe noted that "the arcade game crash of 1984" had "took down the majority of the computer game magazines with it." He stated that, by "the winter of 1984, only a few computer game magazines remained," and by the summer of 1985, Computer Gaming World "was the only 4-color computer game magazine left."
The American game industry lobbied in Washington, D.C., for a smaller $1 coin, closer to the size of a quarter, arguing that inflation (which had reduced the quarter's spending power by a third in the early 1980s) was making it difficult to prosper. (During the 1970s, the dollar coin in use was the Eisenhower Dollar, a massive coin impractical for coin vending machines. The Susan B. Anthony Dollar was introduced in 1979, and its size fit the video game manufacturers' demands, but it was a failure in the general public.) In Canada, existing dollar bills were removed from circulation and replaced with coins in 1987.
Loss of publishing control
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 settled the case in 1982. 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 ensure 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 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.
BYTE magazine stated in December 1982, "In 1982 few games broke new ground in either design or format ... If the public really likes an idea, it is milked for all it's worth, and numerous clones of a different color soon crowd the shelves. That is, until the public stops buying or something better comes along. Companies who believe that microcomputer games are the hula hoop of the 1980s only want to play Quick Profit."
A core cause of the crash was two high-profile titles for the Atari 2600 that were failures. In 1982, 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 1982 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 expense of the marketing campaign for the game resulted in huge losses for Atari. With Atari in full meltdown by the second half of 1983, CEO Ray Kassar was fired and later investigated by the SEC for embezzling company funds, although the charges were dropped.
Atari also issued the widely advertised E.T. game. Once again, it manufactured millions of units in anticipation of a major hit. Concerned about making the Christmas season, Atari again rushed the game to market quickly, after a mere six weeks of development time. The end result is widely considered to be one of the worst video games ever. It is generally inferred that, in order 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 failure for Atari. Eventually the company's arcade and home divisions were split off into two separate companies, the latter being taken over by Commodore founder Jack Tramiel and his sons after their expulsion from that company.
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, stores marked down the titles and placed them in discount bins and sale tables. Recently released games which initially sold for USD$35 were in bins for $5. 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. The largest third-party developer, Activision, survived in part because they also developed games for home computers to offset their console losses. Most of the smaller software development houses supporting the Atari 2600 closed.
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 United States. Retailer 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.
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. In 1986, Nintendo president Hiroshi Yamauchi noted that "Atari collapsed because they gave too much freedom to third-party developers and the market was swamped with rubbish games". In response, Nintendo limited the number of titles that third-party developers could release for their system each year, and promoted its "Seal of Quality", which it allowed to be used on games and peripherals by publishers that met Nintendo's quality standards.
The introduction in June 1986 of the Commodore 64c—a redesigned Commodore 64—meant that the company raised the price of the C64 for the first time, which Compute! cited as the end of the home-computer price war.
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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 in the late 1980s, Nintendo's NES was by far the dominant console, leaving only a fraction of the market to 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 ultimately sold more than 35 million units in the United States, exceeding the sales of other consoles and personal computers by a considerable margin. Other Japanese companies also rivalled Nintendo's success in the United States, with Sega's Mega Drive/Genesis in 1989 and NEC's PC Engine released the same year.
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. While Mattel and Coleco implemented lockout measures to control third-party development (the ColecoVision BIOS checked for a copyright string on power-up), the Atari 2600 was completely unprotected and once information on its hardware became available, little prevented anyone from making games for it. Nintendo thus instituted a strict licensing policy for the NES that included equipping the cartridge and console with lockout chips, which were region-specific and had to match in order for a game to work. In addition to preventing the use of unlicensed games, it also was designed to combat piracy, rarely a problem in the United States or Europe, but rampant in East Asia.
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 licensed games released for the system. These strict licensing measures backfired somewhat after Nintendo was accused of trust behavior. In the longer run, however, many third-party publishers such as Electronic Arts actively supported competing consoles such as the Sega Genesis. Most of the Nintendo platform-control measures were adopted by later console manufacturers such as Sega, Sony, and Microsoft, although not as stringent.
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