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Causes The world wide video game console crash of 1983 was caused by a combination of factors, though with different factors in several markets: The impact of home computers
The flood of products Video games, like toys, are sold through stores on a model that is close to one of consignment. If a title does not sell, it is returned to the publisher for credit, and the store gets a different title in return. The process is repeated until the goods are sold. This business model—which persists today—is a key root of the Crash of 1983. The first chapter of the coming disaster was actually written with high-quality games: Activision was co-founded by Atari programmers David Crane, Larry Kaplan, Alan Miller and Bob Whitehead, who left the company in 1979 because Atari did not allow credits to appear on the games and did not pay employees a royalty based on sales. At the time, Atari was owned by Warner Communications. The developers felt that they should receive the same recognition that musicians, directors, and actors get from Warner’s other divisions. Atari quickly sued to block sales of Activision’s products, but never won a restraining order and ultimately lost the case in 1982. This court case legitimized third-party development, and companies as ill-prepared as Quaker Oats (as division US Games) rushed to open video game divisions, hoping to impress both Wall Street and consumers. Companies lured away each others’ programmers or used reverse engineering to learn how to make games for proprietary systems. Atari hired several Intellivision programmers, prompting a lawsuit by Mattel against Atari that included charges of industrial espionage. Despite the lessons learned by Atari in the loss of Crane, Kaplan, Miller and Whitehead to Activision, Mattel continued to try to avoid crediting game designers. Rather than reveal the names of Intellivision game designers Gabriel Baum, Don Daglow, Rick Levine, Mike Minkoff, John Sohl and others, Mattel instead required that a 1981 TV Guide interview with them was to change their names to protect their collective identities. Colecovision designers like Paul Jaquys worked in similar obscurity, feeding more departures to upstart competitors. Unlike Microsoft, Nintendo, or Sony in later decades, the hardware manufacturers had lost the exclusive control of their platform’s supply of games. With it they had lost the ability to make sure that the toy stores were never overloaded with products. Activision, Atari and Mattel had experienced programmers, but many of the new companies rushing to join the market did not have experienced talent to create the games. Titles such as Chase the Chuck Wagon, Skeet Shoot, and Lost Luggage were less-than-stellar examples of games companies made in the hopes of taking advantage of the video game boom. While heavily advertised and marketed, the games were poor and did not catch on as hoped. The established video game companies also played a role in the crash. For example, when Atari issued its widely advertised E.T. game, it manufactured millions of units in anticipation of a major hit. Unfortunately, the game had been rushed to market after only six weeks of development time.• The game’s poor reputation spread quickly by word of mouth, and the story was picked up by newscasts that trumpeted E.T. as the first great bomb of the video game age. A savage price war At the same time as the gaming shakeout, a home-computer price war was occurring that proved disastrous for some contenders in the industry. As David Ahl recounted: In January 1983, Jack Tramiel, the head of Commodore slashes the price of the Vic to $139 and the C64 to $400. TI reacts a month later with a rebate that lowers the street price of the 99/4A to $149. Tramiel turns around and cuts the price of the Vic to under $100, forcing TI to announce a further cut in the price of the 99/4A to $100 to take effect in June. On June 10, 1983, TI announced the largest loss in their corporate history and three months later withdrew from the home computer market. Tramiel, still looking for market share, slashed the price of the C64 to $200 and virtually walked away with the holiday buying season for the second year in a row. Besides TI, casualties included the Coleco Adam, the Timex-Sinclair line, and a number of other smaller players. Atari nearly went bankrupt and in 1984 was sold off by its parent company Warner Communications (now part of Time Warner). The purchaser was, ironically, Jack Tramiel. Commodore’s board of directors, keen on taking the company into a direction away from home computing, had forced him out; even the winner of the home computer war found it a Pyrrhic victory. Immediate impact on the industry The rush to market of so many substandard games in 1982 flooded the retail channel. Inside Mattel, one Intellivision sales executive explained the problem by saying, "Two years of products have been pushed into the channel in one year, and there’s no way to re-balance the system." When stores went to return goods to these new publishers, the publishers had neither new products nor cash to refund the retailers’ money. Many publishers, including Games by Apollo and US Games (the ill-fated Quaker Oats games unit), quickly folded. Unable to return the unsold games to defunct publishers after Christmas in 1982, toy stores marked down the titles and placed them in discount bins and sale tables. Where the typical game of 1982 cost $34.95—about $71 in 2005 U.S. dollars when adjusted for inflation—the discount bins quickly settled on the price of $4.95 per game. By June 1983 the market for $34.95 games had plummeted, being replaced by the market of rushed, low-budget games. Consumers’ trips to the store often began and ended at the discount bin, the uninformed customer seeing cheaper games as more appealing regardless of quality. After some time, the consumers began to tire of the substandard quality of the cheaper games, and rather than pay the high prices for the dwindling number of high-budget games, they quit gaming entirely. A massive industry shakeout resulted. Console manufacturers Mattel, Magnavox, and Coleco all abandoned the video game business. Imagic withdrew its IPO the day before its stock was to go public, and later collapsed. While the largest of the third-party cartridge makers, Activision, survived for several more years on personal-computer platforms (thanks to their then-legal ability to average their income and recover millions in past tax payments from the IRS), most of the smaller software development houses supporting the Atari 2600 closed. Some game enthusiasts consider 1983 a peak time in the history of arcade games, the home video game consoles’ bigger, stand-alone brethren located in diners, shopping malls, and video arcades. Notably, this was the year the hugely successful Dragon’s Lair was introduced, the first laserdisc video-game, which incorporated full-motion video animation. But coin-op games were caught up in the public perception that "the video game fad is over," and their sales dropped off sharply as well. Additionally, the toy retailers which controlled consumers’ access to games had concluded that video games were a fad, the fad was over, and that the shelf space should be reassigned to different products. This lead to many retailers refusing to have anything to do with video games for several years, and was the most notable wall that Nintendo ran up against when trying to market U.S. branded Famicom in the U.S. This directly prompted Nintendo to name the console an "Entertainment System" to distance itself from video game consoles, and include a toy robot called R.O.B. to convince toy retailers to allow it in their stores. Long-term impact on the industry The crash had two long-lasting results. First, dominance in the home console market shifted from the United States to Japan. When the video game market recovered in 1987, the leading player was Nintendo’s NES, with a resurgent Atari battling Sega (actually founded by an American, David Rosen) for the number two spot. Atari never truly recovered, and finally stopped producing game systems in 1996 after the failure of the Atari Jaguar. A second, highly visible result of the crash was the institution of measures to control third-party development of software. Secrecy against industrial espionage had failed to stop rival companies from reverse engineering the Mattel and Atari systems, and hiring away their trained game programmers. Nintendo—and all the manufacturers who followed—controlled game distribution by implementing licensing restrictions and the implementation of a security lockout system. Would-be renegade publishers could not publish for each others’ lines—as Atari, Coleco and Mattel had done—because in order for the cartridge to work in the console, the cartridge must contain the appropriate key chip for the lock inside the console and the publisher must acknowledge their license to Nintendo in the copyright notices. If no key chip was present or if the key chip did not match the lock inside the console, the game would not work. Although Accolade achieved a technical victory in one court case against Sega, challenging this control, even it ultimately yielded and signed the Sega licensing agreement. Several publishers—notably Tengen (Atari), Color Dreams, and Camerica—challenged Nintendo’s control system during the 8-bit era. The concepts of such a control system remain in use on every major video game console produced today. Nintendo reserved the lion’s share of NES game revenue for itself by limiting most third-party publishers to only five games per year on its systems. It also required all cartridges to be manufactured by Nintendo, and to be paid for in full before they were manufactured. Cartridges could not be returned to Nintendo, so publishers assumed all the risk. Nintendo portrayed these measures as intended to protect the public against poor-quality games, and placed a golden seal of approval on all games released for the system. Although most of the Nintendo platform-control measures were adopted by later manufacturers like Sega, Sony and Microsoft, the others never used such strong measures to hold a larger share of the games market for themselves, which later forced Nintendo to follow suit. The hardware manufacturers of 2005 routinely receive $9 U.S. or more for every licensed software product sold by authorised third party publishers, and defend their legal rights aggressively. This allows console manufacturers to cash in on the success of third-party publishers, and it also gives the console manufacturers control over shoddily produced, pornographic, or otherwise controversial third-party games such as Custer’s Revenge that could taint the console’s reputation. A lesser effect of the crash that lasted through the end of the 1980s until a new generation of console hardware had arrived: Surviving game development and publishing companies began targeting home computer platforms in the absence of a strong console to target. Electronic Arts, for example, was founded in 1982 and began shipping titles in 1983; it avoided being caught in the crash because of its business plan to develop only to computers. The computer game market was worldwide, but proved to be particularly strong in the United Kingdom. Notes | ||||||||||||
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