For today‘s gamers, it may be impossible to imagine that the now $100+ billion video game industry was almost destroyed before it could fully take shape. But in 1983, the bottom fell out of the video game business in spectacular fashion. This infamous crash saw revenues plummet by 97% in just two years, companies go bankrupt, and the future of video gaming in serious jeopardy. So how did this juggernaut entertainment medium nearly vanish seemingly overnight? Here‘s a deep dive into the factors that led to the crash, its immediate impacts, and how the industry ultimately resurrected itself.
The Golden Age – Skyrocketing Growth Sets Unrealistic Expectations
To understand how the video game business could collapse so rapidly, we first need to examine the breakneck growth that preceded the 1983 crash. Throughout the late 1970s and early 1980s, video games exploded in mainstream popularity, driving massive sales growth.
The advent of arcade hits like Space Invaders (1978) and Pac-Man (1980) made video games a cultural phenomenon. Atari sought to capitalize on this by launching the Atari 2600 as the first mainstream home video game console in 1977. Sales went from just $75 million in 1977 to over $2 billion by 1982 as hits like Space Invaders and Pitfall drove adoption. Atari held an enormous 80% share of the home console market by 1983.
Buoyed by Atari‘s success, competitors flooded the market trying to ride the video game wave. The total number of consoles available swelled from just 5 in 1977 to over 15 different choices by 1983, including:
- Magnavox Odyssey
- Atari 5200
- Fairchild Channel F
- Bally Astrocade
The Astronomical Growth of Video Game Revenue:
Hundreds of game development companies formed to feed the ravenous demand for content on these home consoles. Revenue and sales growth routinely exceeded over 50% year-over-year as video games entered a "Golden Age" of skyrocketing popularity and limited competition.
Atari executives made wildly optimistic sales projections, at one point estimating they would achieve $2 billion just in 1981. This boundless enthusiasm and drive for perpetual exponential growth planted the seeds that would lead to the impending crash.
The Warning Signs of Impending Disaster
Several factors emerged in the early 1980s that signaled trouble on the horizon:
Flood of Low-Quality Games
In 1979, fewer than 100 gaming titles had been released across all consoles. But by 1982, the number catapulted to over 500 titles in that year alone. Most of these games were rushed to market, capitalizing on popular movies or brands with little emphasis on quality or playtesting.
For example, the infamous E.T. The Extra-Terrestrial game by Atari is often cited as one of the worst games of all time. It was developed in just 5 weeks to capitalize on the movie‘s release but was painfully hard and filled with bugs, rendering it nearly unplayable.
With such a glut of subpar games being hurriedly pushed out by countless developers, consumer frustration grew. Many games were purchased sight unseen only to disappoint once buyers got them home. Retailers lacked the shelf space to properly display so many titles. They were forced to slash prices to attempt to clear out merchandise that wasn‘t selling.
Console Makers Engaged in a Price War
While each console maker touted its unique capabilities, most played very similar versions of hit arcade ports, like Pac-Man and Space Invaders. Very few exclusive hit games existed that were only available on one console or the other. This meant consumers were confused by largely undifferentiated options and had little reason to purchase multiple consoles.
At the same time, console makers engaged in a price war, selling their hardware at or below cost in an attempt to squeeze competitors out of the market. Their expectation was that profits would be realized from software sales. However, this proved to be unsustainable, especially with a subpar array of game titles driving purchases. Losing money on each console sold put pressure on manufacturers reliant on fledgling third-party developers.
The Home Computer Boom
Just as console makers battled it out fiercely for market supremacy, a new disruptive threat entered the fray – affordable home computers. In 1977, less than 1% of US households owned a personal computer. But by 1983, 15% of households – over 4 million units – had purchased home computers, such as:
- Commodore 64 (released 1982)
- Apple II (released 1977)
- Tandy TRS-80 (released 1977)
These home computers boasted office productivity software and tools for managing household finances, along with increasingly robust games. Hit games like Flight Simulator and Lode Runner drove PC gaming forward.
For many families, buying a computer with multiple functions instead of a dedicated gaming console started to make more sense, especially at a similar price point. This cut into console sales significantly.
Retail Support Erodes
The glut of mediocre games combined with falling console prices led to retail stores struggling to sell hardware and software. Unable to return unsold merchandise to manufacturers, they were forced to mark down prices substantially to clear inventory. Many retailers reduced shelf space dedicated to video games or stopped carrying them altogether amidst slowing sales.
Without retailer support, console makers were left without a pipeline to reach customers. The stage was set for an epic collapse.
The Crash Decimates the Video Game Industry
By the end of 1983, the booming video game market completely imploded:
- Overall industry revenues plunged a staggering 97% between 1983 and 1985, from $3.2 billion to just $100 million.
- Hundreds of manufacturers and developers declared bankruptcy, including Atari, which posted a $500 million loss.
- Retailers dumped millions of unsold, unwanted game cartridges into landfills to clear shelf space.
- Major companies like Magnavox and Coleco abandoned the video game business entirely to cut their losses.
- Once red hot game development firms like Activision teetered on the edge of bankruptcy.
The damage was immense and immediate. Consumer confidence in video games collapsed. This left little hope that the industry would ever recover to its former heights. How could such a dominant form of entertainment virtually disappear in the course of two years?
Nintendo Brings Video Games Back From the Dead
Though the console video game business lay in ruins in North America, one unlikely company was positioned to bring it back to life – Nintendo. Nintendo‘s Famicom home console system took Japan by storm, with an amazing 19% of Japanese households owning the system by 1984.
To adapt their successful Famicom for American audiences, Nintendo made some key strategic decisions:
- Rebranded as the Nintendo Entertainment System (NES): By removing the word "video game", Nintendo sidestepped the negative baggage and aimed for a broader entertainment positioning.
- Stricter Licensing Terms: Nintendo maintained tight control over game development and manufacturing, only allowing 5 titles per year per developer to avoid oversaturation.
- Seal of Quality: Games had to pass Nintendo‘s rigorous quality assurance testing to receive the Nintendo Seal of Quality before release. This ensured basic playability and polish.
This strategy paid off enormously. By 1988, over 30% of American homes had purchased an NES. The system‘s pack-in Super Mario Bros game became a classic megahit. Revenue for the video game industry rebounded in a major way:
- 1985: $100 million
- 1987: $600 million
- 1991: $4 billion
Nintendo single-handedly brought video games back from the abyss through strict quality control and restraint in their licensing agreements with developers. Their Seal of Quality rebuilt consumer confidence in the industry.
Lasting Changes That Prevented Another Crash
While devastating in the short-term, the video game crash led to positive industry-wide changes:
- Emphasis on Quality Over Quantity: Nintendo ushered in an expectation of basic quality standards and playtesting instead of rushed, unfinished games.
- Conservative Annual Sales Projections: Companies shifted to modest, incremental sales growth goals versus the unchecked exponential growth projections that set unrealistic expectations pre-crash.
- Platform Exclusives: Console makers now cultivate exclusive hit franchises and technical capabilities to differentiate their systems. This entices consumers to purchase particular consoles to access unique experiences.
- Ratings System: Creation of a video game ratings system (e.g. E for Everyone, T for Teen) gave consumers clarity on which games were age appropriate for their children.
These and other strategic changes born out of the 1983 crash helped establish a stable, healthy video game industry built to thrive for decades to come. Catastrophic collapses on the scale of 1983 are unlikely thanks to hard lessons around quality, restraint, and meeting consumers‘ needs. While still impacted by occasional cyclical downturns, the gaming business today stands on a much sounder footing than the overhyped, unchecked Wild West days preceding the crash.
In retrospect, the crash of 1983 stands as a stark warning of unchecked exponential growth and the consequences of oversaturating consumers with subpar products. However, it also gave rise to a disciplined video game industry poised for a sustained run of success by learning critical lessons early in its formation. The modern gaming world remains vibrant thanks in part to the phoenix-like rise from the ashes of 1983.