September 23, 2023: Video Game Crash of 1983
Good afternoon. Today we’re going to go off the beaten path and take a look at a major event in the video game industry: when the American industry collapsed and appeared to be on the brink of disappearing from 1983-85. The video game industry is a fascinating one, and I could easily write dozens of posts about it. And I am sure that for many readers of this blog, as for me personally, video games are an important part of our lives.
We should add some caveats at the outset: the video game crash of 1983 occurred mainly in the United States. In Canada, and in markets outside of North America, the industry did comparatively well. The event has been referred to at the Atari Crash in Japan, and Japanese game companies, especially Nintendo, were enormous beneficiaries, as we will see. Of major sectors of the industry, consoles were the hardest hit, though arcades were hit too.
In 1983, video games as a commercial industry were young. The first home video game system was the Magnavox Odyssey, released in 1972, and the first commercial, coin-operated video game was Commercial Space, released in 1971. While novel, Commercial Space was not a hit; the first commercially successfully arcade game was Pong, released the following year.
Obviously the industry had to start somewhere, and the Odyssey was that place. It was a groundbreaking product, and creator Ralph Baer considers the Odyssey to have been successful, but its commercial performance was mediocre. The Odyssey was the first of what came to be known as the first generation of video game consoles, also known as Pong consoles because so many played Pong or variations thereof. The main characteristic of the first generation was that games were built into the system, and there was no way to play a different game than what was programmed. Wikipedia provides a list of almost 1000 consoles comprising the first generation.
Fairchild Semiconductor brought a major advancement with the Channel F (Channel Fun), launched in November 1976 as the Video Entertainment System. Unlike previous consoles, the Channel F features removable ROM cartridges, meaning that a player could swap cartridges and play a different game on the same machine. It was the first of the second generation of consoles. The Gaming Historian has a fascinating look (37 minutes) at the Channel F. Again, while technically groundbreaking, Fairchild made some marketing missteps, and the Channel F also had mediocre commercial performance.
But by 1977, the market was flooded with Pong consoles that were rapidly being considered technically obsolete. This led to the first video game crash of 1977 to 1978. Because the industry was so new and fragmented, hard numbers about the depth of the crash are hard to come by, but we see clearly that Pong consoles were the marketing rage before the crash, and afterwards, they had disappeared. The theme of a market saturated by low-quality products will be seen again in the 1983 crash.
Back to the second generation, the market would soon be dominated by the Atari VCS (Video Computer System), released in September 1977 and later rebranded as the Atari 2600, though it wouldn’t see its first huge breakout hit until Space Invaders in 1980. During this era, Atari was an industry titan, famously employing Steve Jobs, Steve Wozniak, and Bill Gates before these people went on to build their own companies. The Atari 2600 remained far ahead of its competitors, which included the Bally Astrocade, the Magnavox Odyssey II, the Mattel Intellivision, the ColecoVision, and the Vectrex, among many others.
It is mind-boggling today, but Atari’s original plan was to monopolize game publishing for themselves. The game cartridges, moreso than the the console itself, was to be Atari’s main source of revenue. And so they were not happy when a group of disgruntled game developers, including David Crane, bolted from Atari and founded Activision, the first third-party game developer, and Atari predictably sued. The lawsuit was settled in 1982. The settlement allowed Activision to continue publishing, and they would pay royalties to Atari for every game sold. Activision published many hits for the Atari 2600, especially Pitfall!, and they remain a solid game developer, with hits including the Call of Duty series.
Today it is understood that a game console needs strong third-party support to be successful, but unfortunately for Atari, many third party games were bad. Following Activision’s success, a slew of third party developers emerged, such as Mythicon, many of which produced low quality games, including such masterpieces as Chase the Chuck Wagon and Lost Luggage, or games that were merely slightly modified clones of popular games. There were no Internet and no magazines, so consumers had nothing but word of mouth to determine which games were good. Aside from bad games, there were games in extraordinarily bad taste. Mystique published a number of pornographic games for the Atari 2600, most notoriously Custer’s Revenge.
Despite their hostility to third parties, Atari had little defense, with no equivalent of the lockout chip, for instance.
There were some high profile first party failures as well. In 1982, Atari ported Pac-Man to the 2600, which although partially successful commercially, was widely panned as inferior to its arcade counterpart. That same year came E.T.: The Extraterrestrial, which was rushed to capitalize on the success of the movie for the 1982 Christmas season. E.T. has developed a reputation as a uniquely terrible game, but in fact contemporaneous reviews were mixed, and the game is hard to distinguish from the great many other mediocre games at the time. Here is a heartwarming TV commercial for E.T., which shows more craftsmanship than the game itself.
Atari overproduced Pac-Man and E.T., leading them to bury excess cartridges at a landfill in New Mexico. For many years I thought this was just an urban legend, but in 2014 the site was excavated. The formerly buried games are now valuable collector items.
By 1983, the stage was set for a crash. The U.S. economy was coming out of a brief but severe recession, triggered by Federal Reserve Chairman Paul Volcker drastically raising interest rates to get inflation under control. Atari CEO Ray Kassar understood that there must be a point of saturation of demand, but he overestimated what that demand would be. A combination of recession, overestimation of demand, loss of consumer confidence from bad games, a glut of poor third party games, and competition with personal computers led to a decline of the American console market. Sales plummeted from $3.2 billion in 1983 to $100 million in 1985, a nearly 97% decrease. The decline in arcades was not quite as severe but significant: of 10,000 arcades that existed in 1982, 1500 closed over the next few years, and the surviving arcades lost 40% of their revenue. It was the end of the golden age of arcades. Analysts doubted the viability of the industry and thought it might be a passing fad.
But the industry eventually came back to life. In 1985, Nintendo brought the Famicom to North America as the Nintendo Entertainment System, and the NES dominated the console market in the third generation as Atari had in the second generation. Today, the industry is far larger and far more diverse than it was in 1983. Since 1983, there has not been a crash of anywhere near the same magnitude.
The most obvious legacy of the crash is the decline of Atari. In 1982, Atari released the Atari 5200, a machine with serious flaws that was discontinued after two years, and it probably contributed to oversaturation. The Atari 7800, though a fairly good machine in its own right, could not gain traction against the NES. The Atari Lynx, though technically superior to the Nintendo Game Boy, also struggled to gain traction and was a commercial failure. Finally, Atari attempted to bridge the fourth and fifth generations of consoles with the Jaguar, but this was a critical and commercial failure and their last attempt at a console. Atari was purchased by Hasbro Interactive in 1998 for $5 million, a shadow of its former self. Today Atari focuses on “video games, consumer hardware, licensing and blockchain”.
Nintendo learned many important lessons from the crash, particularly around the need for quality control, especially of third party developers. Nintendo developed the Seal of Quality to communicate to consumers which games were legitimate. Nintendo initially limited third party developers to five games per year for the NES to enforce quality over quantity. The NES was equipped with a lockout chip to foil unauthorized third party developers, though some third parties found ways to circumvent it. To maintain a family-friendly reputation, Nintendo imposed strict censorship. In its marketing, Nintendo sought to avoid association with the crash by branding their product as an “entertainment system” and with R.O.B. the Robot.
But these measures have caused Nintendo to struggle with third party support. Nintendo’s weakness with third parties began with the Nintendo 64, was blamed for the failure of the Wii U, and remains a problem.
Video game arcades had a bit of a renaissance after the Golden Age with titles such as Street Fighter II and Mortal Kombat, but with the arrival of fifth generation consoles (Sega Saturn, Sony Playstation, and Nintendo 64), arcades went into terminal decline and now, like drive-in movie theaters, are confined to niche markets.
As explained in this comprehensive (and long) history of video games, computer gaming and console gaming diverged after the crash and followed two mostly separate tracks through the 1990s.
Japanese companies dominated console gaming for many years after the “Atari crash”. After Nintendo, Sega and Sony scores major commercial successes. An American company would not achieve a major commercial console success again until Microsoft’s Xbox in 2001.
Most of what I have said so far is fairly uncontroversial and a standard narrative of the crash of 1983. Yet I find myself unsatisfied with this story. No piece of it really explains what went wrong. Maybe the recession was a factor in the crash, but video games did well in the 2008 recession and thrived during the height of the COVID-19 pandemic. What is termed the Golden Age of Hollywood began in the Great Depression.
Was the loss of consumer confidence resulting from bad games to blame? There have been plenty of high profile bad games since the 1983 crash, such as the original Final Fantasy XIV. Yet there are no obvious negative repercussions to the Final Fantasy series, let alone to the industry as a whole. And as noted above, the Atari 2600 port of Pac Man and E.T. have reputations that go far beyond actual flaws. A major difference today, though, is that consumers have plenty of ways of finding out which games are bad, which may limit the damage they can do the industry as a whole.
What about oversaturation? Industry observers have been saying for years that the video game market is again oversaturated, yet the industry is doing fine. The number of high quality games that are available for free (even before we get into piracy) or for very low prices would have boggled the mind of any industry observer from 1983.
What about controversial games? In 1993, the U.S. Senate held hearings about video game violence, with two games in particular, Mortal Kombat and Night Trap, singled out for attention. The episode led to the creation of the Entertainment Software Ratings Board (ESRB) system of ratings, but the moral panic had no visible effect on the industry’s performance. The same could be said about later controversies, such as addiction and World of Warcraft and the Gamergate episode.
I would suggest one more factor. In 1983, video games were not well-established and seen largely as children’s toys. Now the industry has 50 years of commercial establishment, and gaming cuts across all demographics. There is also a greater diversity of platforms—PC gaming, mobile gaming, console gaming—and all sorts of specialized genres. All this gives the industry resilience that it did not have in 1983, and mainly for this reason I don’t think that anything like the 1983 crash could occur today, even if some individual companies or genres falter.
When it comes to business trends, the future cannot be predicted. If it could, we wouldn’t have had the Ford Edsel, New Coke, or Google Glass. But there is a notion that while the future cannot be predicted, the past becomes clear in retrospect. I would submit that in many cases, including in our understanding of the video game crash of 1983, this is an illusion caused by the fact that while prediction can be falsified, retrospective analysis can rarely be falsified, and it is very easy for hunches and speculation to become calcified as common wisdom. Both before and after 1983, the video game industry is full of stories of companies achieving success by sticking to allegedly bad strategies, succeeding by trying new things that go against common wisdom, and failing by “fighting the last war”. Those who would have us learn the “lessons of history” seldom really understand what those lessons are.
Quick Hits
Six months ago, the Future of Life Institute called for a six month pause of the development of large language models. That obviously didn’t happen. The ostensible purpose of the pause was to give the industry time to develop policies that would insure that artificial intelligence would develop safely. The fact that no such pause was instituted would not have precluded safety work, and so we can reasonably ask, were any viable solutions developed in the last six months?
Mali, Burkina Faso, and Niger have agreed to a defense pact. All three countries are now ruled by military juntas that recently launched coups against the previous governments. This year’s Global Terrorism Index finds that the Sahel region is now the world’s worst hotspot for terrorism, and these figures don’t yet reflect the impact of the Niger Coup. With the Wagner Group being formally submitted to the Russian government, Russia is more overtly supporting the coups. The situation in the Sahel doesn’t yet have a prominent place in Western news, but I am pretty sure that it will in the next few years.
This week, Justin Tradeau of Canada accused the Indian government of murdering Hardeep Singh Nijjar, a leader in the separatist Khalistan movement. That there is not clear evidence of this, and that good relations with India are seen as important for geopolitical reasons, have led to Canada gaining little support from allies. India has significant internal conflict—religious conflict, caste conflict, and separatist movements—as well as a large international diaspora, so I don’t think that this will be the last time that these conflicts become internationalized.
There are news reports that construction on the Jeddah Tower will resume. The Jeddah Tower aims to become the new world’s tallest building and the first to exceed a height of 1 kilometer, but for various reasons, construction has been on hold since 2017. The bidding process for a new contract is underway, and based on discussion at Skyscraper City, I think actual construction should resume in December. I’ll believe it when there is photographic proof of onsite activity. For perspective, the Jeddah Tower is to be about as tall as the new One World Trade Center and the Willis Tower (Sears Tower) combined.