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Video game crash of 1983

From Academic Kids

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Screenshot of E.T. (Atari 2600 version)

The video game crash of 1983 was the sudden crash of the video game business and the bankruptcy of a number of companies producing home computers and video game consoles in North America in late 1983 and early 1984. It brought an end to what is considered the second generation of console video gaming.

The crash was followed by a gap of three years during which there was a much smaller market in games for home computers in North America, and no significant development for video game consoles. That gap ended with the success of the Nintendo Entertainment System (NES) in 1987.

The crash was caused by a "perfect storm" combination of factors: a weak economy, a profusion of poor quality games (particularly the Atari 2600 versions of Pac-Man and E.T.), and very aggressive marketing of inexpensive home computers, especially the Commodore 64. Other home computers vying for consumer attention at the time included the Commodore VIC-20, Atari 800XL, Tandy Color Computer and Texas Instruments TI-99/4A.

Up until the early 1980s, personal computers had primarily been sold in specialty computer stores and at a cost of more than $1,000 USD. The early 1980s saw the introduction of inexpensive computers that could connect to a TV set and offered color graphics and sound. Since they generally had more memory available and better graphics and sound possibilities 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 much easier to pirate, since they came on floppy disks or cassette tapes instead of ROM modules.

Commodore International went so far as to target video game consoles in its advertising, offer trade-ins towards the purchase of a Commodore 64, and suggest that kids who were college-bound would have to own home computers, not video games. Atari and Mattel research confirmed that these television ads badly damaged both their machines' images and their sales.

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Screenshot of Pac-Man (Atari 2600 version)

Unlike most other computer manufacturers, Commodore also sold the machines in the same outlets as video game consoles: discount, department and toy stores. Commodore's vertical integration allowed it to engage in some predatory pricing; its margins were much higher than that of Texas Instruments, Coleco and Atari, and, making matters worse, Commodore's MOS Technology, Inc. subsidiary actually manufactured many of the chips, notably the 6502 CPU used in Atari computers and video game machines. The situation was similar to the calculator market in the early 1970s, when companies found themselves buying chips from Texas Instruments but having to compete with TI's calculators.

However, video game companies also played a role in the crash. For example, when Atari issued its widely panned E.T. game, it manufactured millions of units in anticipation of a major hit. Unfortunately, the game had been rushed to market, and its low quality yielded poor sales, leaving Atari with huge stocks of product unable to be sold. Many of Atari's business decisions during this period were subsequently blamed on overconfidence – one of their executives was reported to have said "I could put [anything] in a box and it'd sell a million copies," apparently in defense of E.T.'s poor critical reception.

Unlike Microsoft, Nintendo and Sony in later decades, the hardware manufacturers lost the exclusive control of their platforms' supply of games. This led to a flood of lower-quality third party titles. Activision was co-founded by four Atari employees in 1979, who left the company because Atari did not allow credits to appear on the games and did not pay employees a royalty based on sales. Atari quickly sued to block sales of Activision's products, but lost the case in 1982. This court case legitimized third party development, and companies as ill-prepared as Quaker Oats rushed to open video game divisions, much to the amazement of both Wall Street and consumers. Unlike Activision, they did not have top designers to create the games.

Video games, like toys, are sold through stores on a model that is close to one of consignment. If a title does not sell, it is returned to the publisher for credit, and the store gets a different title in return. The process is repeated until the goods are sold.

The rush to market of so many substandard games by poorly prepared publishers in 1982 flooded the market. When stores went to return goods to these new publishers, the publishers had neither new products nor cash to refund the retailers' money. Many, like Games by Apollo and the ill-fated Quaker Oats games unit (US Games), quickly folded. Inside Mattel, one Intellivision sales executive explained the problem by saying, "Two years of products have been pushed into the channel in one year, and there's no way to re-balance the system."

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. Where the typical game of 1982 cost $34.95 -- a higher price point than 2002 when adjusted for inflation -- the discount bins quickly settled on the price of $4.95 per game. By June of 1983 the market for games at $34.95 had plummeted, since consumers' trips to the store were beginning and ending at that discount bin.

The result was a massive shakeout of the industry. Console manufacturers Mattel, Magnavox, and Coleco all abandoned the video game business. While the largest of the third-party cartridge makers, Activision, survived for several more years (thanks to their support of various computer platforms), most of the smaller software development houses that had sprung up supporting the Atari 2600 closed. Activision eventually faded as well, although its name and assets were purchased by a new management team who built a new, highly successful company based on the old brand.

Computer sales were also affected, as the Coleco Adam, TI-99/4A, and the line of Timex-Sinclair computers were withdrawn from the U.S. market, along with a number of other smaller players. Atari nearly went bankrupt and was sold off by its parent company Warner Communications (now part of AOL Time Warner). It was worth noting Mattel returned to the market briefly, years later, with its acquisition of The Learning Company in 2000, only to divest it to the Gores Corporation less than two years later.

The crash had two long-lasting results. First, dominance in the home console market shifted from the United States to Japan. When the video game market recovered in 1987, the leading player was Nintendo's NES, with a resurgent Atari battling Sega, also of Japan, for the #2 spot. Atari never truly recovered, and finally stopped producing game systems in 1996.

A second highly visible result of the crash was the institution of measures to control third-party development for video game consoles. This allowed console manufacturers to cash in on the success of third-party developers, since the console manufacturer received a royalty on every copy of a game sold for its console, and it also gave the console manufacturers control over shoddily produced third-party games that could taint the consoles' reputation.

Some game enthusiasts consider 1983 a peak time in the history of arcade games, the home video game consoles' bigger stand-alone brethren located in diners, shopping malls, and video arcades. For example, the first real-time 3D arcade game was created that year (called I, Robot).

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