Video game crash of 1983
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Video game crash of 1983 |
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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.
This phenomenon unfolded primarily in the United States and Canada, since the contemporary global market for video game consoles had not yet evolved.
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) that was first introduced in 1985 and would break out in popularity in 1987.
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Causes
The video game crash of 1983 was caused by a combination of factors:
- Very aggressive marketing of inexpensive home computers, especially the Commodore 64, 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?" Marketing research for both 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.
- A flood of poor titles from hastily-financed startups, combined with weak high-profile Atari 2600 games based on the hit movie E.T. and the red-hot arcade game Pac-Man.
- The news media sensationalized both the halcyon days of 1980 and the problems of 1982-83. In particular, the story of Atari burying tons of E.T. cartridges in a New Mexico landfill accelerated the change from The Video Game Boom is Boundless! headlines to The Video Game Boom is Over! proclamations.
- The conclusion by key toy retail chains in 1983 that video games were a passing fad (see Cabbage Patch Kids and Beanie Babies for examples) and that valuable shelf space should be allocated to new items.
The Impact of Home Computers
Up until the early 1980s, personal computers had primarily been sold in specialty computer stores 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. Many competing models vied for consumer attention. As the pioneering computer-book author and journalist David H. Ahl recounted in 1984:
In the spring of 1982, the TI 99/4A was priced at $349, 16K Atari 400 at $349, and Radio Shack Color Computer at $379, while Commodore had just reduced the price of the Vic 20 to $199 and the C64 to $499.[1]
Since these and other 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 much easier to copy illegally, since they came on floppy disks or cassette tapes instead of ROM modules.
Commodore explicitly target video game consoles in its advertising, offer trade-ins toward the purchase of a Commodore 64, and suggest that college-bound children would need to own computers, not video games. Research by Atari and Mattel confirmed that these television ads badly damaged both their machines' images and sales.
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 those of Texas Instruments, Coleco, or Atari, as Commodore's MOS Technology, Inc. subsidiary actually manufactured many of the chips (notably the 6502 CPU) used in Atari computers and video game machines. A similar situation had occured in the calculator market in the early 1970s, when companies found themselves buying chips from Texas Instruments but also having to compete with TI's calculators.
The Flood of Products
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. This business model -- which persists today -- is a key root of the Crash of 1983.
The first chapter of the coming disaster was actually written with high-quality games: Activision was co-founded by four Atari game designers 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 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 rushed to open video game divisions, hoping to impress both Wall Street and consumers. Companies lured away each others' programmers or used reverse engineering to learn how to make games for proprietary systems. Atari hired several Intellivision programmers, prompting a lawuit by Mattel against Atari that included charges of industrial espionage. Rather than give credit to the Intellivision game designers, Mattel instead required that a 1981 TV Guide interview with them change all their names to protect their identities.
Unlike Microsoft, Nintendo, or Sony in later decades, the hardware manufacturers had lost the exclusive control of their platform's supply of games. With it they had lost the ability to make sure that the toy stores were never overloaded with product. Activision, Atari and Mattel had experienced programmers, but many of the new companies rushing to join the market did not have experienced talent to create the games. Titles such as Chuck Wagon, Skeet Shoot, and Lost Luggage were less-than-stellar examples of games companies would make in the hopes of selling their product and taking advantage of the video game boom. While heavily advertised and marketed, the games were poor and did not catch on as hoped.
The established video game companies also played a role in the crash. For example, when Atari issued its widely advertised E.T. game, it manufactured millions of units in anticipation of a major hit. Unfortunately, the game had been rushed to market after only six weeks of development time[2], and its low quality yielded poor sales, leaving Atari with huge stocks of product it could not sell. The game's poor reputation spread quickly by word of mouth, and the story was picked up by newscasts that trumpeted E.T. as the first great bomb of the video game age.[3]
Retailers' Loss of Faith
The rush to market of so many substandard games in 1982 flooded the retail channel. 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." 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 US Games, the ill-fated Quaker Oats games unit, quickly folded.
Unable to return the unsold games to defunct publishers after Christmas in 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 —- about $71 in 2005 US dollars when adjusted for inflation —- the discount bins quickly settled on the price of $4.95 per game. By June of 1983 the market for $34.95 games had plummeted, since consumers' trips to the store often began and ended at the discount bin.
Worse yet, the toy retailers who controlled consumers' access to games had concluded that video games were a fad, the fad was over, and that the shelf space should be reassigned to different products.
A massive shakeout of the industry resulted. Console manufacturers Mattel[4], Magnavox, and Coleco all abandoned the video game business. 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[5] on personal-computer platforms (thanks to their then-legal ability to average their income and recover millions in past tax payments from the IRS), most of the smaller software development houses supporting the Atari 2600 closed.
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. Notably, this was the year the hugely successful Dragon's Lair was introduced, the first laserdisc video-game, which incorporated full-motion video animation. But coin-op games were caught up in the public perception that "the video game fad is over," and their sales dropped off sharply as well.
A Savage Price War
Contemporaneous with the gaming shakeout was a home-computer price war that proved disastrous for that industry. As David Ahl recounted:
In January 1983, Tramiel (Jack Tramiel, the head of Commodore) slashes the price of the Vic to $139 and the C64 to $400. TI reacts a month later with a rebate that lowers the street price of the 99/4A to $149. Tramiel turns around and cuts the price of the Vic to under $100, forcing TI to . . . announce a further cut in the price of the 99/4A to $100 to take effect in June . . . On June 10, 1983, TI announced the largest loss in their corporate history and three months later withdrew from the home computer market. Tramiel, still looking for market share, slashed the price of the C64 to $200 and virtually walked away with the 1983 holiday buying season for the second year in a row.[6]
Besides TI, 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. Commodore's board of directors had forced him out; even the winner of the home computer war found it a Pyrrhic victory.
Long-term impact on the industry
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 number two spot. Atari never truly recovered, and 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. Secrecy against 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 building copyright information into every cartridge (and, later, every disc). 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 the code inside the game had to display the Nintendo copyright notice. If no copyright notice was present, the game did not work. Including the copyright notice meant the publisher falsely labeled the game as Nintendo property, exposing itself to lawsuits. 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. These companies soon failed commercially. Variants of this control system remain in use on every major video game console.
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.[7] 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.
Although most of the Nintendo platform-control measures were adopted by later manufacturers like Sega, Sony and Microsoft, the others never used such strong measures to hold a larger share of the games market for themselves. Some critics have argued that Nintendo's persistent attempts to retain a high percentage of the titles published for its system for Nintendo-published games has worked against it as its market share in the industry has dropped over the last decade.
The hardware manufacturers of 2005 routinely receive $9 US or more for every disk sold by licensed publishers, and defend their legal rights aggressively. This allows console manufacturers to cash in on the success of third-party publishers, and it also gives the console manufacturers control over shoddily produced, pornographic, or otherwise controversial third-party games such as Custer's Revenge that could taint the console's reputation.
Notes
- ^ Ahl, David H. (1984). "The first decade of personal computing." Creative Computing, November 1984
- ^ See this GameSpy article on the dumbest moments in gaming.
- '^ Overconfidence likely led to many of Atari's poor business decisions during this period. Michael Hannagan of Atari is reported to have said, "I could put shit in a box and it'd sell a million copies," apparently in defense of E.T.s poor critical reception.
- ^ Mattel returned to the market briefly with its acquisition of The Learning Company in 2000, only to divest it to the Gores Group less than two years later.
- ^ Activision eventually faded as well; its name and assets were purchased by a new management team led by Bobby Kotick who built a new, highly successful, but otherwise unrelated company based on the old brand.
- ^ Ahl, op. cit.
- ^ 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.
References
- 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
- Intellivision site Includes extensive history of the era and the crash
- Classic Gaming Expo site Biographies and history of the era]
