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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However, the Ouya has been the most successful kickstarter campaign to date and will be the first privately funded console in decades. Telltale Games, the indie company, is sweeping up nearly every Game of the Year Award. And the Piston, the Valve Console, is on the near horizon and is expected to severely cut into the market profits.

Meanwhile the Wii U has produced nothing noteworthy, EA has publicly announced that it will not produce games without multiplayer, Bungie has announced Halo 5. Bioshock Infinite nearly plummeted off the charts and very few noteworthy and original games came out this year for the current consoles.

I don't see so much a crash as a DRAMATIC shift in market power and what consumers want. Unless the larger video game industry starts taking risks the way it used to, it WILL get swept up ad lost in the undertoe.

Games are becoming over complicated and bogged down by combos and controls that are impossible to remember. I want games that are fun and challenging but not insanely hard.

ET ‘The game’ reportedly cost $25million to develop (this included rights, licensing and adverting) and was supposed to be Warners/Atari biggest release to date however out of the 4 million cartridges produced only 1.2 million sold.

The rest supposedly are supposeldy buried in the Californian desert

I think there a fantastic growth in just this area within indie games. If you have a PC (or Mac), check out Steam (Valve's game portal) and download some awesome games such as Braid, Trine, Plants vs. Zombies, Deadlight, Limbo... the list goes on. What's more (and this is where Steam gets it so right IMHO) is they'll cost you only a few quid each, so you're only risking the price of a pint to try something new.

I lived through this first games revolution (and crash) and was already a keen gamer. I think what the glut of shoddy games also did was herald the dawn (and power) of the games reviewer.

Developers today may curse them, but back in the 80s and 90s when all you had to base your purchase decision on was the back of the box and, if you were lucky, word-of-mouth, they were a trusted voice in the darkness. Remember, games coverage in mainstream media was almost non-existant and even good shows like Gamesmaster or Music, Games & Videos, struggled to keep up with the release calendar and were rarely 'fair' (usually focusing on the triple-A GOOD games, rather than warning of the awful ones). To my teenage self, games journos were the angel on my shoulder saying "remember those screenshots are NOT actual game footage" and "be careful that company used to be US Gold".

It'd be good if the developer and games press could get back to better 'trusted' terms. When I read that a review is NDA'd until launch day (such as with Aliens: Colonial Marines) I realise that the days of videogame landfill are not yet behind us.

Has Bioshock:Infinite been released yet? And Bungie did not announce Halo 5 but Destiny, although it is another Sci fi shooter. So called AAA gaming has cornered itself by not only being too expensive to produce but too expensive for the consumer too impulse buy. For the past few years the compromise of franchises and sequel after sequel kept things going, but even that bubble has started to burst and publishers frantically try different to offset the rising production costs in a market of increasingly discerning consumers with things like F2P models. And, yes, more and more people have just given up on the whole notion of AAA gaming and started to look at what indies are offering. The main challenge facing gaming is not chasing after the guys who want "bigger and better" -there just isn't enough of them to sustain that market- and just focus on the games.

The symbiosis between games and reviews back in the 80s and 90s was a golden era when the user and the developer were very closely intertwined but eventually you could almost guarantee that as the money started to take over then there was no way that companies would allow 'honest' reviews to damage their investment in the product and it became just another consumer product.

The best thing to do is to get online and support the Indie gaming community. Small projects by people with big imagination and skills. And they don't cater to you - they make games for the love of making a game which is what it used to be like on the shelves.

That's not to say the big publishers make bad games - but they cater to you and they cater to forecasted sales based on x,y and z and what the last report told them. That is a compromise which totally dumps on the artistic side.

Play Braid, or Mark of the Ninja or something more recent like Antichamber and you find yourself in a new fresh undiscovered world, with some new and interesting mechanics to play with. Play Far Cry 3 (which isn't awful) and you're back with a gun in your hand and a car to drive and a WOEFULLY terrible script and story - which has been done a million times before. Or Max Payne 3 - same story except without the driving.

And added to that - the indy games are technically much shorter games but they test you so you spend more time using your brain. In Fry Cry you can spend hours opening chests to get money. Rewarding?! NO! Finding the 150th hidden relic - rewarding?! NO! Is working out how to solve a puzzle by rewinding time and doing something different after failing to do it 100 rewarding? Yes - yes it is!

So I implore you to keep an eye on and support the indie gaming world - these people don't ask for loads of money and they produce some really good stuff.

Sorry, I guess I should have clarified that the pre-orders for B:I have been far lower than expected, hence part of the reason they keep upping the ante on the pre-orders. And I will personally stand up and applaud when I see Bungie actually do something new, but for now from what I've seen, I see Halo, with some new game play elements and styles, especially considering that they will be working with the publisher of Call of Duty.

It's honestly possible that I might be willfully ignoring some facts, but the industry has done that to gamer's for the past few years, so if they're going to "win me back" they're going to have to earn it.

The problem is the crash started in December of 1982, not in 1983. As far as ET, you only have half the story.The rights to the movie (and the accelerated schedule) were more forced on them rather than "acquired." Warner chairman Steve Ross had been trying to lure Spielberg away from his studio to Warner, and tried to use this deal as a carrot. Hammering out with Spielberg during a weekend party at his house in the Hamptons he agreed to ridiculous terms such as an exorbitant amount of royalties (and not just the royalties but the fact that they were guaranteed regardless of actual sales), and the promise it'd be out by Thanksgiving for the Christmas shopping season (it was a Thanksgiving release, not a December release). He then called over to Atari and said here's the deal, go to it. Spielberg had also specifically requested Howard Scott Warshaw, as HSW had previously done Raiders as well. The end result that HSW was only given 5 and a half weeks to come up with the concept, code, and debug/playtest in before the code had to be handed off to be fabricated (put into ROM format) for production.
The deal with Spielberg is why so many had to be manufactured, it had nothing to do with getting "carried away." Likewise, Spielberg was very happy with it at the time.

Additionally, E.T. and Pac-Man had very little to do with the downfall of Atari - they were simply minor players in the overall problems that were plaguing the company which represented 80% of the home video game industry at the time. In fact everything was set in place and causing the downfall of the company long before E.T. was even released. First and foremost was the dual management enforced by parent Warner, forcing decisions on the company and second guessing Atari's own management in lieu of keeping Atari their golden cash cow to pump up Warner's earnings. The second was little to no inventory control. Having had dealers place orders for the entire '82 in advance, and then having nothing in place to deal with the mounting returns, cancellations and backstock (something they never faced before) by the Summer of '82 their distribution warehouses around the U.S. were overflowing. They began playing shell games with earnings and quarter lengths, which eventually lead to the disastrous December 7, 1982 earnings report which started putting Atari's (and Warner's stock) in a nose dive. That's when the crash began. Being 80% of the industry (an industry that analysts had been repeatedly saying was going to crash) meant immediately repercussions for the other companies, and their stocks immediately began tanking as well, leading to a roller-coaster stock the rest of the month and layoffs starting in January '83.

The full story of the industry crash was covered in Retro Gamer magazine #100, likewise the full story behind Atari's demise is covered in the 800 page book "Atari Inc. - Business Is Fun" on Amazon.

The industry is certainly in decline. I can't speak for everyone, but myself and other gamer friends ditched consoles years ago since they're ancient. Now it's all PC / Steam.

But release a new Xbox with Fallout 4 and I won't get my wallet out fast enough.

I would argue the complete other end of the spectrum. Games have become dumbed down SO much since the olden/golden days of gaming. Anyone that's ever played games like Ultima or Wizardry will know exactly what I mean.

To set the record straight, Activision entered the market well before the crash, and actually set a high quality standard that not even Atari could match. Many other publishers cluttered the market with sub-standard games some years later, and of course Atari had some famous mis-steps as well, but to suggest that Activision contributed to the glut of bad games is just untrue.

You know what I find amazing about all of this????????

Games are going backwards. I have been playing games since it all kicked off, I have had a Spectrum, C64 , Amiga, Nintendo SNES, and now a PC.

My argument is this, people are playing games on Apple Ipads etc or the Wii that are as primitive to look at and play as the same sort of stuff I was playing on the SNES twenty years ago.

Dont get me wrong, they are fun games, a lot of them are pretty good, but the IPAD is a classic exampe of what I am talking about. You pay £300 - £600 for one and then play games on it that are not as good as a SNES game was for example...Its a bit mental.

The other day my brother was playing an IPAD version of that old MB electronic game SIMON. You know the one with flashing lights you have to copy in sequence....Its fun etc but its an idea that was done years ago...and you did not have to pay £300+ for the hardware to do it on. I know Ipads can do other things as well, I am just using it as an example..

A Nintendo WII has incredibly primitive hardware, the games all look really dated and naff, but the gimick of the controller is what sold it to millions and the fun factor of waving a wand around the living room, until you smack someone in the face or let go of it and watch it take out the nearest window, or your expensive Tv.....

Good graphics etc do not make a good game though...I just think the game industry, like the film industry has reached saturation point. Its all been done at some stage and coming up with a good idea is very hard. Everything is either a simulation, a FPS or platformer or racer....Hmmmmmmm

Then there is the money side of it too...How much are these new consoles going to cost? PS4 or whatever it is...its going to be expensive...then if they charge £50 a game, and lock it so you cant trade it in...Sony might be in for a big shock with that idea. I had no idea there was even a new Nintendo console out either...

Heheheheh I can remember buying games for the ZX Spectrum on tape for £5-6 a game...can you imagine paying that now?? Remember all the fuss about Ultimate Play the Game when they brought out SaberWulf and dared to charge £10 for it?????
Happy days....But people have less money now, things are tight, and unless the new wave are consoles are JAW DROPPINGLY AWESOME, with lots of amazing games that are pretty unique, they might find shifting lots of them very hard to do....

You know what I miss the most? The Britishness of games of the 80s....Stuff on the Spectrum and C64 programmed by bedroom coders that were just like the people buying them.

Everything is so coporate and big industry and American etc now. Imagine some Uk firm putting out something like Manic Miner, or Firelord or Dun Darache today....Manic Miner with its mutant Telephones and toilets that chased you....Gremlin Graphics and its Monty Mole games, or the Cauldron games....

So very British and funny and quirky and stuff you could relate to. Steve Crow based the buildings in Firelord on stuff he saw every day in his local town and the villages in his area, so you saw old barns, Oast Houses just dont get that sort of British feel in games now. It did not cost a lot to produce a game and so it did not cost a lot to buy. It was all new and fresh too...

PC as a platform is noticeable in its absence here. More profitable than ever, I'd say.

And Wizzbang, I'd say you're playing the wrong games if you feel like that. Try the ones GoblinKing suggested. Have a look around. There are lots of challenging, enjoyable games where you don't have to have the training of an airline pilot to play.

Just got to say here that Bungie is no longer doing Halo, and havent done anything since Halo:Reach, Halo 4 was made by 343 Industries which was an offshoot of Bungie created for the sole purpose of the Halo Universe. Bungie have announced a new game for this year called Destiny.

Is it in decline? I have no idea myself as I dont pay that much attention. I own a PC and have never bothered with consoles since the SNES. I just think console gaming is too limiting. You cant upgrade, change stuff on a console, or get mods for games etc. I have just stuck with the PC from when it was nothing, to the glory days of Doom , Quake etc and I am still playing now.

I always got the impression that everyone gamed on consoles these days because you dont have to worry about anything. You just put the disk in and the game works and there are no problems or hardware issues. People are too lazy and just want the game on and working, and are often not clever or pc savvy enough to work out what to do to fix a game if it does not work first time.

Everyone I know has either an Ipad or a laptop, and think its weird I still have a custom built desktop pc. I do that so I can have a huge screen and fast cpu and can change the graphics card and upgrade ram etc when I need to.

And when I go into HMV or Game there is practically zero rack space given over to Pc games, its just rack after rack of Ps3, Xbox, Wii titles and it used to be all Pc or computer stuff. I dont know how people manage to shoot anything in a FPS with a gamepad. Its so hard. Give me a mouse and keyboard for the precision every time.

Everyone keeps saying Pc gaming is dead etc, but I still use one to game on, as well as work, create web pages etc. I am probably out of touch. I have always used a computer, so its what I am used to and I am qualified in that field.
So does this mean that Pc gaming is coming back then? That would be nice to know......

Heheh the stuff of legends...maybe one day they will all mutate and meld together underground, and turn into one giant super E.T. based game cartridge inteligence that will dig itself out and then try to take over the world in revenge for the wrong done to it....
Heheh that would make a great crap low budget comedy horror film.....

If games cost $30-40 out the gate, I'd certainly buy more of them. I very rarely will shell out the full $60. That little bit does make a difference in my budget.

Try living in Australia where you get ripped a new one every time you purchase a game - $80-$100 for a new release even though the Aussie dollar is worth more than the US peso.

"Most importantly, Nintendo learned from Atari’s mistakes..."

True, and very smart of them too. but didn't Nintendo also engage in Monopolistic practices with regards to 3rd party developers?

"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."

I don't know about that. The late 80's-early 90's saw a whole bunch of consoles: Nintendo. Sega, Neo-Geo, Turbo-Grafix, and Atari, not to mention the computers, and it didn't hurt the industry. Quite the opposite, this was the true Golden Age of gaming.

I don't really own any modern systems and rarely play any modern games, but from what I see maybe the problem is how few the genres have become?

Good post man, interesting, I'll be hunting that book down, cheers.

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