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The North American Video Game Crash of 1983 was a recession in the video game market that occurred in 1983 and ended in 1985 when the Nintendo Entertainment System entered the market. Because of the crash, Japan would dominate the console market for many years because of the rules Nintendo would make to prevent another crash.

This event led to a brief period in North America in which almost all video games were shunned, caused the bankruptcies of many gaming companies and made many stores believe gaming was only a fad.

While E.T. the Extra-Terrestrial is often considered the main cause of the crash, that belief is heavily exaggerated, there were many more factors in the crash, with the main factor being saturation of the market.

Factors

Over-saturation of Consoles and Flooded Market

Since 2001, there are three main choices for gaming consoles: Nintendo, (Microsoft) Xbox, and (Sony) PlayStation. In 1983, however, there were tons of consoles to choose from, which made gamers wary over what to buy. At the time of the crash, there were over a dozen systems, including the Atari 2600, the Atari 5200, the Bally Astrocade, the ColecoVision, the Coleco Gemini, the Emerson Arcadia 2001, the Fairchild Channel F System II, the Magnavox Odyssey 2, the Mattel Intellivision, the Sears Tele-Games systems, the Tandyvision and the Vectrex; some of the aforementioned consoles were simply hardware clones, such as the Sears Tele-Games line being rebranded clones of both the Atari 2600 and Intellivision. Each console either had a near-identical library of ports from the two big hitters (the Atari 2600 and Intellivision) or barely any games at all. Most console manufacturers announced further future consoles as well as developed and released games on other consoles, which confused gamers over what to get.

Competition with Home Computers

Home computers, such as the Commodore 64 and the Sinclair ZX Spectrum, typically had more memory and faster CPUs than their video game console contemporaries at the time of the crash, which allowed them to run more sophisticated games. While many home computers used ROM cartridges to load software and expand the capabilities of the computer, they also utilized other storage mediums such as cassette tapes and floppy disks; compared to a ROM cartridge, cassettes and floppy disks were cheaper, could hold more data, and were rewriteable. An aggressive price war among the major home computer manufacturers (Atari, Commodore, Sinclair, Tandy, and Texas Instruments) in 1982 and 1983 brought the cost of a home computer down close with video game consoles, and home computers also had the capability of running non-gaming software, such as word processing and home accounting programs, making them more attractive to parents.

Loss of Publishing Control

At the time of the crash, Atari was owned by Warner Communications but would not let credits appear in the games and did not pay employees based on royalty of sales. Many employees at Atari were so mad about this, they formed the game company Activision, believing that game developers deserved recognition for the work they did. Activision actually survived the crash by making games for home computers and is the oldest third-party game developer and publisher in the world. Atari sued Activision in 1982 but settled the case that further allowed many other third-party developers to make games for the Atari 2600. In fact, some companies like Quaker Oats made their own games to take advantage of the gaming craze.

Shovelware and no way to avoid it

With the video game craze, many companies were making their own games without any form of publishing or quality control. In the six months leading up to December 1982, the number of games on the market more than quadrupled. Most of the companies had inexperienced game developers, and the games, while highly advertised, were poor in quality to the point where some were actually worse than E.T. in terms of gameplay. Without quality control nor any form of quick reliable reviews to determine which games were good, a large amount of shovelware made to get a quick buck flooded console libraries, and gamers were frequently buying and getting disappointed by them. In addition, retailers could not dedicate enough shelf space to keep up, and had no way of knowing which of the seemingly endless stream of titles would actually sell. As a result, it was often the case that all of the games available in a particular store would be awful.

High Profile Failures

Two well-known games were the Atari 2600 port of Pac-Man which was considered vastly inferior to the arcade version and was panned by gamers and critics, and despite being the best-selling Atari 2600 game of all time, only half the cartridges manufactured were actually sold. This is because Atari manufactured more cartridges than Atari 2600s sold, thinking the game's demand would sell more 2600s.

Atari failed to learn this lesson with E.T. the Extraterrestrial. Because Atari operated a generous buyback policy for unsold copies of games, Atari was left with around 8.5 million E.T. and Pac-Man cartridges. To put this into perspective, just storing these cartridges, without boxes, would require eighteen 40-foot shipping containers, all but the last stacked floor-to-ceiling. Both of these failures hit Atari's finances very hard which contributed to the crash and led to Atari burying and paving over truckloads of worthless and faulty games and hardware in the New Mexico desert.

The burial in New Mexico (which was incorrectly identified as being the whole stock of E.T. cartridges) and Atari's massive losses caused many to lose faith in the business.

Aftermath

The sheer number of systems left most stores unable dedicate enough shelf space to stock a full range of consoles and their games. Overly-generous return policies and a huge number of failed games led to massive return rates, and some publishers were unable to pay the stores back, causing several to fold fast. Some stores also discounted many of the games since they could not return them to defunct companies.

Many companies also abandoned the game industry entirely and many toy stores conceded that video games were a fad and stopped selling them, which would be a barrier for Nintendo to overcome when releasing the NES. Sales for video games and consoles plummeted and many more companies went bankrupt. Over the course of the crash, the US video game market contracted to just 3.1% of its former size, going from being a $3.2 billion industry in 1982 to a mere $100 million in 1985.

The Crash ended when the Nintendo Entertainment System proved to be highly successful. The NES's success revitalized interest in the industry which had rebounded to $2.3 billion by 1988. Nintendo set up strict controls and regulations to prevent another game crash, in particular limiting game releases to five per year per company, and centralizing cartridge production, forcing publishers to pay for cartridges in advance and then handle their own inventories. This policy led to several publishers losing more money from the NES than they ever made from it due to writeoffs of unsaleable inventory at the end of the console's lifespan, and in turn to several publishers developing long-standing animosity towards Nintendo.

It should be pointed out that the Crash only really affected North America, other regions in the world were unaffected and some didn't even notice it was happening.