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 gaming 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 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.
Too Many Consoles and Flooded Market
Today, there are three main choices for gaming consoles: Xbox, PlayStation, and Nintendo. 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 was 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 Intellivision II, the Sears Tele-Games systems, the Tandyvision and the Vectrex and many Pong Consoles.
Each console had a near-identical library of games, third party support and most console manufacturers announced future consoles as well as developed and released games on other company's consoles, which confused gamers over what to get.
In addition, many games were hastily being made by startup companies believing that video games were easy money. Many were poorly made for the Atari 2600 which heavily damaged the reputation of the company.
Competition with Personal Computers
Personal computers, such as the Commodore 64, had better memory and better hardware at the time of the crash which further hurt the console market as they could make more sophisticated games.
Though the Crash ended with Nintendo saving the gaming market, PCs remain a powerful rival to gaming consoles.
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 personal 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 them
With the video game craze, many companies were making their own games without any form of publishing or quality control. 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.
High Profile Failures
Two well-known games were the Atari port of Pac-Man which was considered vastly inferior to the arcade port 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, not only that, E.T. cartridges were frequently returned to stores leaving most of the produced cartridges unsold. In fact, there were more E.T. and Pac-Man cartridges than there were Atari 2600 consoles, as Atari had assumed those two games would get more Atari 2600s sold. Both of these failures hit Atari's finances very hard which contributed to the crash and led to Atari burying and paving over several tons of worthless and faulty games and hardware in the New Mexico desert.
The burial in New Mexico and Atari's massive losses caused many to lose faith in the business.
Due to the flooding of the market with inferior games, many stores were unable to hold so many games, returning them to the game publishers 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.
The Crash ended when the Nintendo Entertainment System proved to be highly successful. The NES's success revitalized interest in the industry, and Nintendo set up strict controls and regulations to prevent another game crash.
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 happened.