In 1983, video game revenue reached $3.2 billion, less than 2 years later in 1985 revenue fell to 100 million. Video game arcades had doubled to 10,000 from 1980 to 1982, the following years over 1,500 arcades closed for good and those that remained open saw their revenue fall by 40%. What was going on in the video game industry? This event is formally known as the Video Game Arcade Crash of 1983. We will examine the many reasons for the crash.
The Atari 2600 was the king home video game system of the early 1980s. Although Atari was launched in 1977, it wasn’t till it released Space Invaders in 1980 that the system took off. Atari sales quadrupled after the release. Atari’s success brought copy cat competitors. The Odyssey, Intellivision, ColecoVision and Vectrex all entered the market to get a piece of the booming video game market. Atari even introduced a new system Atari 5200, a higher end model than the 2600, to gain an even bigger slice of the Video game revenue pie. Coleco even sold an add on allowing Atari 2600 games to be played on ColecoVision.
Each video game system had its own library of games. An increased demand for video games caused the growth of the video game market. In 1983, an analyst for Goldman Sachs stated that the demand for video games was up 100% from 1982. That’s a great problem to have right? Unfortunately, video game manufacturers increased game output to 175%, which created a market surplus. Raymond Kassar the then CEO of Atari predicted market saturation. Kassar did not expect his prediction to come to fruition till half of American households had a video game console, unfortunately Kassar was 15 million machines off his prediction when the crash started.
The release of so many games flooded the market. Most stores had insufficient space to carry all the games and consoles. Stores tried to return the surplus games to the new publishers, but the publishers had neither new products nor cash to issue refunds to the retailers. Some publishers went out of business. Unable to return the unsold games to publishers, stores marked down the games and placed them in discount bins.
Recently released games which were going for $35 ($92 in current times) were going for $5 dollars ($13 in current times). The bargain sales of poor quality titles drew sales away from the more successful third-party companies and games. Uneducated consumers bought the cheap mark downed games instead of the better quality games.
2. Too many third party publishers
In 1979, four former Atari programmers left the company to start Activision. Activision took most of their games and cartridge manufacturing ideas from Atari. This displeased Atari, and they sued to stop the sale of Activision. The lawsuit was settled with Activision paying royalties to Atari but continuing to produce its system and games. This event brought on the third party publishing model. Before this lawsuit, console manufacturers made their own games for their own system.
Activision’s success brought on copy cats (see the pattern?). Imagic, Games by Apollo, Coleco, Parker Brothers, CBS Video Games and Mattel all started producing third party games.
The problem wasn’t the lack of originality but that most of the third party publishers hired fresh computer programmers who lacked experience and thus made games of poor quality. A lot of these games were some of the worst games ever made.
One of the most infamous games of this era was E.T. the Extra-Terrestrial. E.T. was based on the mega box office successful movie, unfortunately, because of licensing negotiations Atari only had five and a half weeks to make the game so it would be available in time for the 1982 Christmas season. Atari produced four million cartridges of the game expecting it to be a big seller. The game only sold 1.5 million units. E.T. the game was critically panned, and is considered one of the worst video games of all times. Remember the over production of games and retailers returning games to the manufactures? Well E.T. was so bad that Atari buried 728,000 cartridges of video games in a landfill in Alamogordo, New Mexico. Many of the cartridges buried were of E.T.
Other awful games released during this era were; Chase the Chuck Wagon a game based on a Purina dog food commercial, Lost Luggage a game about a skycap collecting lost luggage, Journey escape a game based on the rock band Journey and Dishaster a game based on plate spinning. These titles ended up in the aforementioned 5 dollar bin or buried in the desert.
3. Rise of the PC’s
By 1982, Desktop Computers provided better color graphics and sound than game consoles. Computer prices were also in the same ballpark as home game consoles. The TI 99/4A and the Atari 400 were both $349, the Tandy Color Computer was $379 and Commodore’s VIC-20 was $199 and its C64 was $499.In comparison the Atari 2600 was $199.
Computers had more memory and faster processors than consoles which allowed more sophisticated games. People could also use home computers to do more than just playing games. Computers could be used for word processing and home accounting. Games were also easier to distribute since they could be sold on floppy disks or cassette tapes instead of just Rom cartridges. Home computers allowed gamers to save games in progress, a feature that was not available on home consoles.
A price war developed between Commodore and Texas Instruments in 1982. Commodore cut the price of its 64 to $300 in June 1983, some stores began selling it for $199. At that price a computer was way more useful than a game console.
The U.S. game industry lobbied Congress for a smaller $1 coin, closer to the size of a quarter. They argued that inflation had reduced the quarters spending power by a third and thus made arcade gaming difficult to prosper. The dollar coin in use was the Eisenhower dollar, but it was too big to fit in most gaming machines. The Susan B. Anthony dollar was introduced in 1979 and it could fit into gaming machines, but it was a failure with the public. Ironically, it was the Susan B Anthony coin similarity to the quarter that made it a failure. Congress refused to issue a new dollar coin.
A massive industry shakeout resulted from the crash, Brands like Magnavox and Imagic abandoned the video game industry. Activision started making games solely for home computers. Retailers stopped selling video game consoles or reduced their stock significantly. Atari could never recover nor regain its massive market share. Analysts doubted the long-term viability of the video game industry.
It wasn’t until the Nintendo Entertainment System (NES) took off that the industry recovered. In 1988, sales for the video game industry exceeded $2.3 billion, by 1989 sales reached 5 billion with 70% of the market dominated by Nintendo. 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 it to be used on third party games that met Nintendo’s quality standards. Nintendo set this practice in place so that it wouldn’t met the same fate Atari did a few years earlier.
Nintendo hit the perfect storm of opportunity and demand when they launched their NES system in 1985. Everyone thought the video game market was dead, so Nintendo didn’t have to deal with all the competitors Atari did, they all left the industry or focused on computers. The “Seal of Quality” Nintendo implemented eliminated the third party crappy games problem. Computer prices went back up and were no longer in the same price range as Nintendo. Nintendo with luck and studying the crash revived the U.S. video game industry. In 2017 the U.S. video game industry was worth $ 18.4 billion. The industry is projected to reach $230 billion by 2022. It seems the video game crash was a small but necessary blip in the history of U.S. video gaming.
Originally published at https://mwmblog.com on March 2, 2020.