We are in 2018 and we take video games for granted. The home entertainment industry has a value of billions of dollars and year after year it looks like the video games become more appealing even to some slices of population that only 10-15 years ago were almost excluded from the market.
However the situation that we live today is the result of yeras of experimentations, big success and huge loss and no loss in the industry is better known as 1983 video games crash. Although part of the literature today tend to rivisit the actual importance (at least on the financial side) of the crash, there’s no doubt that when it hit, 35 years ago in the America, nobody was even remotely prepared and some of the consequences are still felt today.
There are literally tons of books, opinions and data about the crash and, being such an important event, there are a lot of different points of view about the causes and what really happened and is always difficult to understand where’s the truth. Of course I’m not an expert nor have I lived in first person the crash since I was born two years later and raised with the Nintendo-Sega war, but I’ve always been fascinated by this even so I wanted to give my own opinion about it based (when I could) on the actual data.
This post is a project I have in my mind since last year and I started writing line after line with no rush at the beginning of 2018, so it is by far the most ambitious project I’va tackled since I run this blog, so I hope you’ll find it interesting and that you can feel between the lines the passion with which I wrote it.
The story so far
At the beginning of the 80s the video game industry was still something quite new. The first home console, the Magnavox Odyssey, saw the light of day in 1972, then for three years nothing changed, at least in the home entertraining departement. Always in 1972 the PONG phenomenon hit the market: if you were a kid back in the 70s you’d have probably wasted tons of coins to have the possibility to stay in front of that huge and a bit ugly machine with the eyes wide open on the screen where two small blinky bars were simulating two ping pong rackets with a ball going back and forth, back and forth, back and forth.
This is the point when Atari history began. Then always Atari broke every single front door in America and brought in the home version of PONG with the result of an extraordinary success that led the company to break all the records year after year. Atari soon became one of the most popular and fast growing company in the US and in 1976 was sold to Warner Communication for 30 million $. More or less.
In a couple of years Atari became the most profitable division of Warner and the release of VCS in 1977 contributed to boost the revenues. Atari was so rich that started to convert famous movies into games. The first of them was Raiders of the Lost Ark and another one would have been E.T. just back from an almost unexpected worldwide success in theatres.
The situation in 1982: Consoles overload
Back to 1982. You are a kid and you’re desperately waiting for Christmas to get a new game, better yet a new video game console. It will be your first one so you start in June to bother your parents to the point they can’t wait for Christmas too, so your upsetting background tune will be finally over.
Your parents start to visit shops, video game stores and even supermarkets to see what’s the market has to offer. First of all they think that maybe Atari could be the best choice: it’s one of the most important companies in US and not only regarding video games, has a solid product with a great games library but is on sale since 1977, so maybe it’s a bit too old. A possible conversation between your parents could have been something like this:
We don’t want our child thinks that we want to save money and give him a low range product, we want for him a good system!
Maybe Atari 2600 is not the correct answer, even if the price of 125$ is very competitive. Maybe they can try their new console, the 5200. 5200 is two times 2600 so it should have doube of the power, but the price of 270$ it’s a bit too high! Or maybe we can buy that 2600 clone, the Coloco Gemini, but…I don’t know, why should I have to buy a clone when the original is so cheap?
Wait, Coleco has another console, the ColecoVision. Seems interesting, even the brand logo is alluring and the price of 175$ is not bad for a new console. Maybe it’s not a bad idea considering also that expansion module that can play all the Atari 2600 games, but let’s see if we can find something better.
I’ve heard good things about Mattel Intellivision. The games are almost like the 2600 ones and they say that Intellivision is even better than 2600, but the price of 299$ it’s even higher than the brand new Atari 5200…and for sure I don’t wat to buy that ugly copy of Mattel’s console, the Tandyvision. whoa I’m so confused, too many consoles and it looks like the games are not cross compatible. To buy all the games will cost a fortune for us, better try something cheaper.
I don’t want that bulky Bally Astrocade, it’s old and pricey, neither I want Emerson Arcadia. It cost 199$ but sincerely I’ve never heard about it. And what’s that? Fairchild Channel F System II?! It’s not the same system released 5 years ago? Oh, no it’s a restyle. Bwoah, I don’t think it will be as good as a 2600 or an Intellivision.
I’m exhausted what we can do? Uh, look there’s Magnavox Odyssey². It’s only 100$ and looks like a computer, so maybe it could be a good idea, but I know our son wants something to play with, he doesn’t want something that reminds him school! I don’t know it’s better that we flip a coin…
…uh wait, what’s that? Vectrex? And what’s that horrible screen? Nah…better flip the coin.
So this was more or less the situation at the end of 1982. A huge number of consoles, each one with its games library without any kind of compatibility among each others. And here I mentioned only the main “official” consoles, without considering the clones or the older systems.
The number of console grew exponentially within just a few years. Not considering the millions of PONG home clones, but only focusing to the later first generation consoles and to the second generation here’s what figures says: in 1977 the system were essentially 6, Fairchild Channel F, Coleco Telstar, 1292 Advance Programmable Video System, RCA Studio II, Bally Astrocade and, of course, Atari 2600. In 1978 Magnavox returned on the market with the Odyssey²/Videopac increasing the number to 7, in 1980 Mattel released the Intellivision, so we had 8 consoles, then in 1982, just in one year 7 consoles, ColecoVision, Vectrex, Adventure Vision, Arcadia 2001, Coleco Gemini, Intellivision II and Atari 5200 were put on the market giving the consumers a total of 15 system to choose from. Times has changed but if we consider that today’s market is already quite crowded with only 3 competitors, Windows, Sony and Nintendo we can understand the nightmare that should have been in 1982 for a company trying to make some profits.
Since the consoles market was so overloaded, a good idea back then should have been to switch to the computers market. They were still very expensive but the cost were dropping very rapidly. If a good computer a couple of years before could have cost 1500$-2000$, in the early 80s the prices were going down and it was possible to find a home computer at a reasonable price.
The situation in 1982: Commodore-TI war
If the home entertainment industry was still in its blooming years, the personal compuer industry was probably even in its embryonic phase. In the late 70’s-early 80s the computers (not yet “personal”) were still something dedicated to a small niche of hobbyist with computer science knowledge and a large wallet since a computer in kit (so you had to build it yourself) could have cost up to 10000$. In 1977 the market of the home computers started to grow thanks to the “Trinity of 1977” (Apple II, TR8-80 and Commodore PET). By the end of the 70s the market for the home computer was pretty much limited to the America and the first successful european home computers appeared in 1980 that to the UK-based Sinclair Research founded by Sir Clive Sinclair: between 1980 and 1982 with three different models, the ZX80, the ZX81 and the ZX Spectrum, the home computer started to become affordable for the people, even to those without particular knowledge and the computer started to become a mass product
This has been possible due to an incredible reduction of the prices of the components to build a PC: if at the beginning of the 80s an IBM PC was sold for more than 1500$, a few years later on the shelves you could have found a ZX81 for 70£ (roughly 250€ today): the capabilities were, of course, limited but within a few weeks a young boy could have started typing his own programs and play colourful games with sound.
Since by that time the computers failed to be the multi-tasking items they promised to be, most of the companies marketed their machines for a young target and most of the software companies were releasing games: at this point the home computers were competing with the home consoles on the same battlefield.
However, if an home console could run only games, the home computers were sometimes even cheaper and they could run not only games but also other kind of programs and become an helping hand for the youg kids thanks to the educational software. Moreover the games were on tapes and cassettes, they were cheaper and easy to duplicate.
People started to ask themselves “Why should I buy a video game system when I can buy a computer that will play games and do so much more?”
The decent-to-low prices of the home computers were possible only after the war broke out between Commodore and Texas Instruments. The two companies were selling home computers at an average price and they realized that to gain the share of market of the home consoles they had to lower the price of their flagships. During the spring of 1982 the first shot: at the same time when the TI 99/4A cost 349$ the Atari 400 349$ and the TRS-80 379$, Commodore cut the price of the VIC-20 to 199$ and that od the C64 to 499$.
Now that the gates were open the flood was impossible to stop.
Jack Tramiel in January of 1983 cut the price of the VIC-20 to 139€ and that of C64 to 400$; to re-gain shares and recuperate the losses of 1982 Christmas season, the TI in February lowered the price of the TI 99/4A to 149$. The counter reaction of Commodore arrives in summer when the price of the VIC-20 was cut to 100$. Commodore was almost selling its computer below cost and the result was that on June 10, TI abandoned the market after facing its biggest loss in its history. Being now the only competitor left, Tramiel, not satisfied, looks for other shares of market and halves the price of the C64 to 200$.
The price war and the success of the home computers at the expense of the home consoles is considered as a consequence of the crash but its causes have to be traced in the years before the crash so we can easily say that the computer war has been cause and consequence of the crysis of the home console market.
Activision sells Atari’s blades
Atari business model has been highly profitable towards the end of the 70s and early 80s. It was the most important company in video game market, it had a share that in some moments reached the 70% of US market, had a strong and consolidated base and nine figures incomes. This exceptional conjuncture left Atari for a few years without a valuable competitor and so the company started to sat a bit on the laurels slowing the development of the successor of the ageing 2600. The first decent competitor for Atari had been Mattel with its Intellivision that leveraged on the better quality and improved horsepower in comparison to the 2600. Another slighltly minor but potentially hazardous competitor for Atari was Coleco, when the company released in 1982 the ColecoVision.
However that was just how the competition works: you have a product that sells well and someone else tries to top you with something newer and more appealing. It wasn’t Mattel nor Coleco to lead Atari into a deadly spiral but something else, coming from the inside of the company.
Nolan Bushnell’s decision to sell to Warner Communication in 1976 was surely perfectly timed, since Atari needed funds to boost at first the development and then the sales of its first home console. However this decision had an unpredictable negative outcome. Being part of Warner, that had in its rank actors, musicians and artists in general, the games developers started to claim their rights and to be treated the same way as, for example, the actors, demanding to be credited for the games they made. Atari’s flat refusal to give some recognition to their employees led four of them, the long runners in the company David Crane, Alan Miller, Bob Whitehead and Larry Kaplan to quit Atari and form, on April 1st, 1979 their own company, Activision, to start to develop games mainly for Atari, and in a second time for other systems.
The four fellows were not the first nor the last to have received such treatment and to reach the same conclusions. Even though his case is a bit less known even Warren Robinett, another talented Atari programmer, after having released its masterpiece Adventure decided to resign from the company due to the unstimulating ambient and the low retribution. Atari considered its developers as operators on the assembly line therefore they didn’t receive any royalty of the games created. And giving the fact that Adventure sold 1 million units the royalty for Robinett could have been surely not insignificant.
A small anecdote. The story of the unpaid royalties and the one of the first ever easter egg are closely tied: since Robinett as well as the others developers at Atari were not credited in their games, he decided to use some precious bytes of code to design a room in the game that could be found only in particular conditions, in which you could read “Created by Warren Robinett”. This hidden content remained really hidden for months, when a 12 year old boy wrote to Atari to inform them he discovered the first easter egg.
Activision was the first third-party company and its role in the crash is substantial, but not because they moved war against the colossus Atari, that, as it turned out, was built on shaky fundaments, but for the difficulties Atari encoutered to adapt to a changing market.
The principle was easy. Atari, as any other company back then, had the full control over the hardware and the software: they produced the consoles and they produced all the games compatible with the console. No company have ever had the idea to produce games for another system, they only mind their own business. In this regime of software-hardware monopoly makes sense to apply what they call the razor-blades model in which a company sells at a margin price or sometimes even at loss a product relying to the high sales of consumer product, in this case, video games. Of course this model can be applied only if who build the razors also build the blades or has a substantial share of the blades market.
When Activision shook the foundations of this scheme, Atari found itself in big troubles since they were selling razors with thin margins but someone else was selling the blades making great profits. The market wasn’t regulated yet and was rather volatile so to big profits corresponded big losses.
The only thing Atari could do was to sue Activision for their allegedly illegal practice. The case went to court but in 1982 the judge ruled in favor of Activision opening a huge crack in an already rickety dam. Already in 1979, following the example of Activision and attracted by their profits, other companies, such as Imagic were setting up and almost all of them were producing games for the Atari 2600 who had the biggest market share of which everybody wanted to get a slice.
The market became suddenly a chaotic mess with newborn companies that reverse engineered Atari games to create their own clones, overnight ventures that tried to steal the best developers to the competitors, supermarkets flooded with any kind of game, mostly horribly made and major companies like Coleco that shamelessly developed games for the competitor Atari 2600 to make money with the software due to the poor sales of their consoles. Some crude numbers: in 1979 Atari controlled (of course) 100% of the software market for their console; in 1982 were put on the market 142 games, of which just 21, so 14,7% were Atari branded. Such flood of software eventually killed the industry.
This hype pushed out of the competition a great number of very young and unexperienced companies that were desperately trying to sell their awful products even though most of the stores didn’t have enough space for all those games. The selling practices of the time actually led to massive discounts of the games. The system worked like this: you buy a game and if the game is so bad that you want to return to the seller, he has to refund you or give back to you another title; this system goes on until all the unsold stock is cleared.
If this system works quite good in a small and regulated market, the inflation of titles of 1982 led to a vicious circle: the companies had to give to the stores new and appealing games but the lost income for not having sold the original games give them no margin and no time to produce something good. No cash, no money to make games; no games and no cash. Most of the companies quickly folded and left the market forever while the only way out for stores was to drop the prices of the games, being unable to return them to defunct companies and led them to sell games at a bargain prices in clearance bins; the market for full price games in 1982 was virtually dead and all the people flowed to the budget price market; then most of the stores simply removed all the games from their shelves focusing on more lucrative products, in some cases home computers. The industry was about to be cancelled.
As already anticipated the birth of Activision led many developers to set up their companies in order to release games for the giant, the Atari 2600.
If we consider again 1982, the year before the storm, this trend is clear: of the 142 games released for the 2600, 121 came from 24 different third parties, each one developing an average number of roughly 5 games, the same number of games Atari released throughout all 1981 (for further comparison, Atari released in total 19 games between 1979 and 1980). Of course such an inflate number of games led to two major issues: the low quality of the products and a thinner margin for the companies.
The consequences were dramatic for the industry: Atari’s drop in the share of distributed games number at first didn’t intact its strong leadership in the number of units sold, even if their profits were dropping; among the third parties the selection was merciless: out of the 24 companies that released games for the 2600 in 1982, only Activision is still on business today even though it underwent some fusions and property changes. Most of other 23 companies didn’t even survive until 1985 and a few of them are still alive but have nothing to do with video games, such as 20th Century Fox. Some of them like Imagic and Apollo have a kinda romantic and troubled story.
The problem with the games, as stated, was not only the number, too high even in relation of today’s standards, but their intrinsic very low quality. The video games market in 1981-1982 became the golden goose and companies not even close to the industry, quickly set up their games divisions in order to impress both the consumers and the stock market. To give an example, one of these, US Games, was a small handheld producer which got acquired by Quaker Oats in order to become its video games division: it was the perfect paradigm of the bubble of the market that was about to explode. Some famous brands started to produce bad and outdated games even when there was no reason to do it and they used them as a promotional vector: for example in 1983 Coca-Cola released Pepsi Invaders and Purina the now sought after Chase the Chuck Wagon.
The low quality of games did depend not only by the small time to create a game to avoid to be left out of competition, but also from the budget behind its development, often too small or inappropriately spent and from the capability of the console that in 1982 was five years old and surpassed by the technology of the latter second generation consoles such as the ColecoVision.
Until now I’ve only talked albout Atari, because it was the industry leader but the same principle applies also to the other companies: even Mattel and Coleco, the runners-up in the market, were hit and downsized by the savage advertising of third party developers. Mattel, due to the smaller number of consoles and games sold and for being less appealing than Atari, was able to partially pull the strings of the software market, since in 1982 out of 35 games released for the Intellivision only 12 were produced outside Mattel that therefore kept a share of two thirds of the cake. Coleco instead, since it was new on the market didn’t face any competition software-wise and all the 9 games released in 1982 were Coleco-branded. However the way was paved and the decline was near for everybody.
Referring again to 1982, if we consider the major consoles, Atari 2600, Intellivision, Colecovision, Atari 5200, Arcadia 2001 and Vectrex, a total of at least 250 games were put on shelves to which we have to add the older games still in commerce; to make a comparison, in 1981 two thirds of the above consoles did not exist and the number of games released for the remaining third was a miserable 27. Part of the games were arcade ports of famous titles, released on different consoles, so the gamers were used to see always the same products and most of the other titles were clones of famous games and/or odd or stupid ones. Of course the libraries of games were not compatible with rival consoles (except the case of products like the Expansion Module by Coleco or the Coleco Gemini) so it was difficult to choose a console or another.
I’ve pointed out as clearly as possible what happened up to 1982 in the video games world: hardware and software market saturation, ageing tecnhology, competition from the home computers, rise of third party developers. It’s quite a list of reasons why the bubble quickly deflated but the storiography, at least until very recent years, looks like quite compact in pointing the finger only on Atari and specifically on one single game.
I’ve already expressed my opinion about this game and if you want you can read it here, but even if you have another opinion one thing should be crystal clear: one single bad game cannot lead a whole industry worth 3,8 billion $ into the catastrophe. The truth was probably different; it was like they were all playing Jenga with the market: they were all together building an high tower with the bricks removed from the foundations and Atari’s E.T. had the misfortune to pick the brick that brought down the tower leaving no winner in the match.
The case of E.T. is a perfect example of scapegoat, even though of course the game itself in its peculiar way had its own responsibility for the crash since it should have been the flagship game of the major company in the market. It’s very common when there’s a huge meltdown to indicate a unique reason, exaggerating its role as a cause of it and most of times this scapegoat is either an external allegedly unpredictable cause or something that went wrong inside the system itself. And usually the cause is to be found among the biggest names that are always the most hated and the most envised. Atari was right in the center of the bullseye.
Even though the growth of the market had been abnormal throughout all 1982 almost no one, at least at the beginning of the year, have noticed the big bubble that was growing in the industry or probably they simple didn’t want to admit it. By the second half of the year the situation detonated. The immense flood of games hit the market after the summer and the big part of them were so bad they were returned to the stores, feeding the inflation of titles. On the eve of the Christmas period, the most important of the year, the games that just the year before were sold at the full price of 34,95$ were found in clearance bins at 4,95$. Most of the customers for a while drew on the budget market but eventually abandoned it and switched to the home computers.
According to some predictions made in 1982 the market would have faced a glut in 1983 since three quarters of the sales were generated by only a tenth of the games, while the remaing 90% had to share the remaining 25% of profits. In this 90% was included something like 350 games. This dramatic situation was amplified by the spectacular failure of two highly anticipated Atari 2600 games, Pac-Man and E.T.
Pac-Man is often cited as “the game that contributed to the video game crash” but is even overshadowed by the more dramatic bomb that was the launch of E.T. whose worn cartridge image has become the symbol of the crash.
Even though Atari release a number of good games, there was still a game that was missing in its roster and it was the most famous game after PONG, a game that was set to become the icon of the video games. Pac-Man was released in the arcade by Namco in 1980 and became immediately a smash hit that in the years to come was converted to all platforms and received an immense number of sequels and clones. When Atari got the license to port the game on its console, instructed the programmer Todd Frye to develop the game; however, as they will do with Warshaw for E.T. gave him too little time to make a decent game. Convinced that the success of Pac-Man depended by the gameplay and not by the visuals, the development started late, in May, 1982. Of course the title had to be ready in time for the Christmas season to fully exploit the exceptional sales of the period. The game was ready by September but four months were a too strict deadline and Frye created a game that kinda matched the idea of the original game but it was quite different in terms of graphics, sound and gameplay.
Moreover, optimistically confident that the game would have been a smash hit even on 2600, Atari’s managers decided, advised by Goldman Sachs analyst Richard Simon who predicted a possible sale of 9 million units, to overproduce the game, preparing 12 millions units, more than the actual number of consoles in the US, convinced that the success of the game could have boosted the sales of the hardware (they wanted to sell the blades to drive prople to buy their razors). During the Christmas in 1982, Pac-Man, as it was in the plans, was the best selling game, selling 7 million units. However soon after Atari started to receive harsh critics. The memory of the arcade verion of Pac-Man was still fresh and people didn’t recognize in the console port the same game for which they used to spend a fortune of quarters. Atari had still a huge unsold inventory of 5 million cartridges and to add insult to injury a lot of the games sold were returned by unhappy customers. The game that should have worth between 200 and 500 million dollars became the biggest bomb in the then young history of videogames and left Atari broke: in 1983 their losses reached the staggering figure of 500 million dollars.
It faced the same destiny the other big game Atari put on market in 1982, E.T. The movie was a huge success in 1982 and soon after Ray Kassar approached Steven Spielberg to try and get the right to create a game based on the movie. Spielberg made a deal with Atari giving them the license for the astonishing amount of 25 million dollars. It was an impressive amount of money but the fear to be put in the corner by third parties, Atari’s will to come back on top and the certainty that the game could sell itself boosted by a massive advertising campaign even on TV, convinced Atari’s president to roll the dice. The biggest issue, again, was time. Kassar closed the deal with Spielberg in July 28th, 1982 and considering the time to assemble all the cartridge and ship them, the window to develop the game was only 5 weeks. Kassar entrust the task to Howard Scott Warshaw, who became famous for being the man behind Yars’ Revenge, a game that sold 1 million copies. Warshaw was a workaholic and in that period worked relentlessly on two projects, 7 months on Yars’ Revenge and 6 months on Raiders of the Lost Ark. His idea was to make a game where the player could feel a bit of the passion that surrounded the movie but his generous ideas struggledwith time costraint. He worked day and night and after just 5 weeks he delivered the final version. Not even checked or tested, the game was put on the production line and it was ready for the Christmas time.
The game sold well at the beginning, around 1,5 million copies, but as it was for Pac-Man, after Christmas, a storm of critics invested Atari for the poor quality of the game, that was dull, repetitive and unplayable. Some retailers said thatt he initial success of the game was an effect of the word of mouth especially between adults, while the teenagers and the children preferred Activision masterpiece Pitfall! The figures of E.T. disaster were unveiled by Kassar himself who confessed that out of the 4 millions of units produced, 3,5 millions represented the unsold stock which included unsold cartridges and returns.
The failures of Pac-Man and E.T. undermined the trust in the company and the poor quality of their two most anticipated games dropped the consumers confidence in Atari and in general in the video game industry. Warner Communication, owner of Atari brand, after the catastrophic winter of 1982-83 faced a dramatic loss, with their stock value dropping by a huge 35% meaning a loss of 1,3 billion dollars.
Christmas of ’83 had passed, the bomb had finally exploded and the market could clearly see what was the situation
The sales of home video games had dropped from $3.2 billion in 1982 to $100 million in 1985. To see the value of the market top the 1982 figures we had to wait until 1989 when it reached $5 billion (to give a comparison in 2108 is nearly $18 billion). Almost all of the companies that produced hardware had to fold; Mattel left the industry as well as Coleco and Atari, even though still on business had shrinked so much that it will never ever gain its top position again: it will stay barely afloat for a decade until their last console, the Jaguar, bombed killing forever the glorious company.
Even the software houses were decimated after the crash: all of the companies that flourished in the early 80s were killed and, among the few to have survived, the most important was Activision, ironically one of the factors of the crash; after some years of struggle they became again reliable and they’re now one of the top tier companis in the industry, after a successful chain of fusions and acquisitions.
The main effect of the crash was the rise of Japan as the leading force of the industry: from 1983 to the early Noughties no american company has been able to affect the japanese domincance; for twenty years, first with Nintendo and Sega and then with Sony, Japan has been the only actor in the hardware market, until the rise of Microsoft with its Xbox.
Another consequence, this time on the software side, was a tighter control fo the number and quality of the games developed. Nintendo was an institution in this field and began a strict policy of licensing limitated to 5 titles per year per company; plus Nintendo manufactured the cartridges and imposed to be paid up front. They took four years before they were able to penetrate a still shocked american market and only by 1987 with the rise of the NES the home entertaiment industry started to flourish again.