The 1983 videogame crash: what went wrong, and could it happen again?

Feature Ryan Lambie 19 Feb 2013 - 07:01

A thriving games industry was brought to its knees 30 years ago. Ryan looks at what happened, and whether it could do so again...

In the five years between 1978 and 1983, the videogame industry saw a huge surge in popularity, a halcyon period of soaring profits and new consoles. The advent of Space Invaders ushered in a golden age of arcade gaming, regaining the interest of players who’d long since tired of the Pong phenomenon. The Atari VCS (later known as the Atari 2600) dominated the second generation of consoles, and for a while, Atari’s position in the home videogame industry seemed unassailable.

At its peak, the combined revenue of US arcade and home videogames was worth some $11.8 billion - a sum that far outstripped the profits of the American movie and music industries combined. But just as it reached that dizzying height, the industry suffered a devastating crash - one that saw profits from home console games fall by a staggering 97 per cent. By 1985, a console industry that was worth more than $3 billion on its own was estimated to have fallen to just $100 million.

The cause of the crash was due to a number of factors, but the one most commonly cited was the sudden influx of both rival consoles and hurriedly-produced videogames. The Atari 2600, which at the height of its success was installed in around eight million homes, had long ruled the roost thanks to conversions of such hit games as Space Invaders and Missile Command. But when third-party developers (among them a fledgling Activision, set up by former Atari programmers) began to flood the market with their own games for the console - many of poor quality - the influx led to a bewildering array of consumer choice with little in the way of quality control.

An equally startling number of home consoles, inspired by the success of the 2600, also began to spring up in the early part of the decade. The ColecoVision was one of the better examples, with its accurate ports of the arcade hits Donkey Kong and Zaxxon.

But in spite of all these exterior forces - not least the competition from a growing home computer game market - Atari was ultimately toppled by some of its own business decisions. An abysmal port of Pac-Man had sold incredibly well in 1982, shifting an estimated seven million copies in spite of its evidently rushed programming. It was here that the cracks in Atari’s thinking began to show; even though Pac-Man was a hit, the company had overestimated how many copies it would shift - after those seven million units had sold, the company still had several million left over.

Meanwhile, Atari pressed ahead with what would soon become one of the most infamous videogames in history: E.T.: The Extra-Terrestrial. Programmed in approximately five weeks to hit a lucrative Christmas market deadline, around four or five million cartridges were produced and ready to be sold to what Atari presumed would be a clamouring public.

Perhaps stung by the shoddiness of the Pac-Man port released earlier in 1982, consumers refused to buy E.T. with the same readiness Atari had expected. The unsold cartridges were sent back to Atari, and the videogame industry was provided with its first image of hubris: with no means of shifting the unwanted stock, the company was forced to have the cartridges buried in a Mojave desert landfill.

Although E.T. was but one factor in a complex scenario, the game became the symbol of everything that was wrong with the American console industry in 1983, and the crash that followed was swift and unpleasant. Atari had deep enough pockets to survive, but its dominance of the market would never return. Numerous other companies were less lucky, with several developers and console makers either folding or otherwise abandoning the games market for good.

Ironically, as the console industry in the US was withering, the Nintendo Famicom launched in Japan, and was a huge success. It took two years for the company’s console to arrive in America under the guise of the Nintendo Entertainment System, and retailers were initially wary of selling videogames again after the bruising losses of previous years.

This was why, when the Famicom arrived on American shores, it was essentially in disguise. Where the Japanese version of the console was a cheerful little thing decked out in stylish burgundy and cream, the NES was a more sombre affair, with an industrial white and grey blocky case; cartridges were hidden away in a front loading slot with a lid, and the word ‘game’ was studiously avoided in its branding.

In spite of - or perhaps thanks to - this new approach, the NES reversed the dwindling fortunes of the US console market, leading to a Japanese dominance that would last for more than a decade. Most importantly, Nintendo learned from Atari’s mistakes, and carefully vetted the number of games that third-party developers could release for its system each year - hence those familiar “Official Nintendo” seals prominently displayed on videogame boxes. It was an approach that Nintendo’s rivals also adopted in the years after, from Sega to Sony and Microsoft.

Could it happen again?

In the three decades since 1983, the games industry has seen extraordinary growth; in 2010, its global value crossed the $100 billion mark for the first time. Where videogames were once seen as a niche pastime, they're now played by a broader section of society than ever. Indeed, the games industry continued to grow as other sectors contracted during the 2008 financial crisis, prompting some to hubristically claim that the games industry is 'recession-proof'.

More recently, however, the videogames industry has apparently begun to shrink. In late 2012, data from the NPD Group (a company that specialises in providing market information) suggested that game sales had dropped by 20 per cent from the previous year. The trend, it seemed, was on a downward turn, with US retail sales dropping from a peak of $22 billion in 2008 to $17 billion in 2011.

In reality, though, the figures merely appeared to show a sign that gamers are purchasing their games digitally instead of on disc; the fall of retail profits coincided with the closure of bricks-and-mortar videogame stores, and a sharp uptake in digital sales on consoles, computers and mobile phones.

At the same time, the industry finds itself at a new crossroads. Sales of the ageing Xbox 360, PlayStation 3 and Wii have slowed, and the next generation of consoles is imminent; in Nintendo's case, it's already here, with the Wii U having already launched. But so far, sales of the Wii U have been below Nintendo's forecast; there have even been suggestions that, in January, the Wii U may have sold fewer than 50,000 units in America. By comparison, the Wii sold more than 430,000 units during January 2007.

Nintendo's not the only videogame company to be feeling the pain. After an encouraging first few days, Sony's PlayStation Vita saw its sales plummet by 78 per cent in Japan. Just over a year after its global launch, the Vita is still struggling, and Sony - a company already struggling financially, is facing the unenviable choice between cutting the console's price, or allow its sales to continue on their downward slide (and since the time of first writing, Sony has indeed cut the sale of the Vita in Japan).

Price may well be a key factor in the current climate. Nintendo's rival handheld console, the 3DS, was a slow seller when it launched in early 2011, but the combination of a price cut and the release of some big-name games saw sales take off - the number of units sold globally was approaching 30 million by the end of last year.

It seems that, with the rising use of mobile phones as gaming devices, consumers are less willing to spend more than £200 for a dedicated handheld console; and although the home console market is very different, it could be that the same market forces are affecting sales of the Wii U. After all, what's the point of shelling out almost £300 on a new console, when the devices already under our televisions - particularly if they happen to be an Xbox 360 or PlayStation 3 - can provide all the entertainment we need? The lack of a compelling launch line-up may also have added to the Wii U's weaker-than-expected sales.

The past year has also seen the market valuation of gaming giants such as EA, Activision and Square Enix fall, while THQ went bankrupt. So with all this going on, and the cost of games development rising, could we yet see another crash like the one in 1983?

Although such a thing is impossible to predict, it's certainly the case that the games industry is undergoing a huge change. The rise of Kickstarter has allowed independent studios to secure funding from the public instead of investors; disc sales are gradually being supplanted by downloads; and as development costs for so-called triple-A titles continues to rise, so relatively-low budget games such as Minecraft and Angry Birds have made millions.

With the arrival of new consoles, such as the Ouya and Valve's Steam Box, and suggestions that Apple might join the fray soon, the market could soon become as crowded as it did 30 years ago. As history has proven, a glut of competing games and devices could spell disaster for some recognisable brands.

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