Video game crash of 1983

Launched in 1977 just ahead of the collapse of the market for home Pong console clones, the Atari VCS experienced modest sales for its first few years.

In 1980, Atari's licensed version of Space Invaders from Taito became the console's killer application; sales of the VCS quadrupled, and the game was the first title to sell more than a million copies.

Notably, Coleco sold an add-on allowing Atari VCS games to be played on its ColecoVision, as well as bundling the console with a licensed home version of Nintendo's arcade hit Donkey Kong.

In 1982, analysts marked trends of saturation, mentioning that the amount of new software coming in would only allow a few big hits, that retailers had devoted too much floor space to systems, and that price drops for home computers could result in an industry shakeup.

[6] In addition, the rapid growth of the video game industry led to an increased demand, which the manufacturers over-projected.

In 1983, an analyst for Goldman Sachs stated the demand for video games was up 100% from the previous year, but the manufacturing output had increased by 175%, creating a significant surplus.

Atari quickly sued to block sales of Activision's products but failed to secure a restraining order, and they ultimately settled the case in 1982.

While the settlement stipulated that Activision pay royalties to Atari, this case ultimately legitimized the viability of third-party game developers.

The rapid growth of the third-party game industry was easily illustrated by the number of vendors present at the semi-annual Consumer Electronics Show (CES).

"[14] Bill Kunkel said in January 1983 that companies had "licensed everything that moves, walks, crawls, or tunnels beneath the earth.

[16] Activision, Atari, and Mattel all had experienced programmers, but many of the new companies rushing to join the market did not have the expertise or talent to create quality games.

'"[23] The Boston Phoenix stated in September 1983 about the cancellation of the Intellivision III, "Who was going to pay $200-plus for a machine that could only play games?

[24] Commodore's ownership of chip fabricator MOS Technology allowed manufacture of integrated circuits in-house, so the VIC-20 and C64 sold for much lower prices than competing home computers.

"I've been in retailing 30 years and I have never seen any category of goods get on a self-destruct pattern like this", a Service Merchandise executive told The New York Times in June 1983.

Unable to return the unsold games to defunct publishers, stores marked down the titles and placed them in discount bins and sale tables.

Activision had to downsize across 1984 and 1985 due to loss of revenue, and to stay competitive and maintain financial security, began development of games for the personal computer.

led to the urban legend of the Atari video game burial, that millions of unsold cartridges were buried there.

Gaming historians received permission to dig up the landfill as part of a documentary in 2014, during which former Atari executive James Heller, who had overseen the original burial clarified that only about 728,000 cartridges had been buried in 1982, backed by estimates made during the excavation, and disproving the scale of the urban legend.

[51] In 1986, Nintendo president Hiroshi Yamauchi noted that "Atari collapsed because they gave too much freedom to third-party developers and the market was swamped with rubbish games".

The crash did not directly affect the financial viability of the video game market in Japan, but it still came as a surprise there and created repercussions that changed that industry, and thus became known as the "Atari shock".

[52] The impact on the retail sector of the crash was the most formidable barrier that confronted Nintendo as it tried to market the Famicom in the United States.

A planned deal with Atari to distribute the Famicom in North America fell apart in the wake of the crash, resulting in Nintendo handling the international release themselves two years later.

[66] New Japanese companies entered the market to challenge Nintendo's success in the United States, NEC's TurboGrafx-16 and the Sega Genesis, both released in the U.S. in 1989.

Using secrecy to combat industrial espionage had failed to stop rival companies from reverse engineering the Mattel and Atari systems and hiring away their trained game programmers.

While Mattel and Coleco implemented lockout measures to control third-party development (the ColecoVision BIOS checked for a copyright string on power-up), the Atari 2600 was completely unprotected and once information on its hardware became available, little prevented anyone from making games for the system.

Nintendo thus instituted a strict licensing policy for the NES that included equipping the cartridge and console with lockout chips, which were region-specific, and had to match in order for a game to work.

In addition to preventing the use of unlicensed games, it also was designed to combat software piracy, rarely a problem in North America or Western Europe, but rampant in East Asia.

[69] As Nintendo prepared to release the Famicom in the United States, it wanted to avoid both the bootleg problem it had in Asia as well as the mistakes that led up to the 1983 crash.

The 10NES lockout was not perfect, as later in the NES' lifecycle methods were found to bypass it, but it did sufficiently allow Nintendo to strengthen its publishing control to avoid the mistakes Atari had made and initially prevent bootleg cartridges in the Western markets.

With waning console interests in the United States, the computer game market was able to gain a strong foothold in 1983 and beyond.