The video game crash of 1983 was the year long crash of the video game industry and the bankruptcy of a number of companies producing home computers and video game consoles in North America in late 1983 and early 1984. It brought an end to what is considered the second era of console video gaming.

The crash was followed by a gap of two years, during which there was a much smaller market in games for home computers in North America, and no significant development for video game consoles. That gap ended with the success of the Nintendo Entertainment System (NES) that was first introduced in Japan in 1983 (as Famicom) and then in the United States in 1985 and would break out in popularity in 1987.

This period is sometimes referred to as the video game crash of 1984, because that was the year the full effects of the crash became obvious to consumers. Hundreds of games were in development for 1983 release, most of which ended up in bargain bins. But few games were developed in 1983 for release the following year, resulting in a drought of new video games in 1984.

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  The worldwide video game console crash of 1983 was caused by a combination of factors, though with different factors in several markets:

In Europe, the boom years of personal computing (1981–1985) were trumpeted by very aggressive marketing of inexpensive home computers, especially the Commodore 64, with the theme “Why buy your child a video game and distract them from school when you can buy them a home computer that will prepare them for college?”[1] Marketing research for both sides tracked the change as millions of consumers shifted their intention to buy choices from game consoles to low-end computers that retailed for similar prices. At the same time, a strong culture of playing and writing video games for these personal computers arose in Europe, making the European crash more of a platform shift than a total collapse of the industry.

A similar marketing campaign occurred in the U.S. without the same effect, where instead the personal computer industry grew because of the crash and is not seen as directly causing it.
A flood of consoles on the market giving consumers too many choices. At the time of the U.S. crash, there was a plethora of consoles on the market: Atari 2600, Atari 5200, Bally Astrocade, Colecovision, Coleco Gemini, Emerson Arcadia 2001, Fairchild Channel F System II, Magnavox Odyssey2, Mattel Intellivision (and its just released update with slew of peripherals, Intellivision II), Sears Tele-Games systems (which included 2600 and Intellivision clones), Tandyvision, and Vectrex. Each one of these had their own library of games, and many had (in some cases large) 3rd party libraries. Likewise, many of these same companies announced yet another generation of consoles for 1984, such as the Odyssey3, and Atari 7800.

A flood of poor titles from hastily financed startups, combined with weak high-profile Atari 2600 games based on the hit movie E.T. and the red-hot arcade game Pac-Man.

The news media sensationalized both the boom days of 1980 and the problems of 1982–83. In particular, the story of Atari burying thousands of E.T. cartridges in a New Mexico landfill[3] shifted the outlook of the video game market in the eyes of many media outlets.

Up until the early 1980s, personal computers had primarily been sold in specialty computer stores at a cost of more than $1,000 USD, which is over $2,500 in 2006 American dollars. The early 1980s saw the introduction of inexpensive computers that could connect to a TV set, and offered color graphics and sound. The first of these systems were the Atari 400 and 800, but many competing models vied for consumer attention. As the pioneering computer-book author and journalist David H. Ahl recounted in 1984:

In the spring of 1982, the TI 99/4A was priced at $349, 16K Atari 400 at $349, and Radio Shack Color Computer at $379, while Commodore had just reduced the price of the VIC-20 to $199 and the C64 to $499.

Since these and other computers generally had more memory available—and better graphic and sound capabilities—than a console, they permitted more sophisticated games and could also be used for tasks such as word processing and home accounting. Also, their games were sometimes much easier to copy, since they came on floppy disks or cassette tapes instead of ROM modules (though many of them continued to use ROM modules extensively, or even primarily, as well).

Commodore explicitly targeted video game consoles in its advertising, offered trade-ins toward the purchase of a Commodore 64, and suggested that college-bound children would need to own computers, not video games. Research by Atari and Mattel confirmed that these television ads badly damaged both their machines' images and sales.

Unlike most other computer manufacturers, Commodore also sold the machines in the same outlets as video game consoles: discount, department and toy stores. Commodore's vertical integration allowed it to engage in aggressive discount pricing; its margins were much higher than those of Texas Instruments, Coleco, or Atari, as Commodore's MOS Technology, Inc. subsidiary actually manufactured many of its own chips (notably the 6502 CPU). Some companies had to get their chips from this subsidiary, leading to a similar situation that had occurred in the calculator market in the early 1970s, when companies found themselves buying chips from Texas Instruments but also having to compete with TI's calculators. Other companies, such as Atari (who used the 6502 in Atari computers and video game consoles), were able to set up deals to allow manufacturing with their own third party companies.

The first chapter of the coming disaster was written with games with perceived high quality: 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 examples of games companies made in the hopes of taking advantage of the video game boom. While heavily advertised and marketed, the games were perceived to be of poor quality 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 t 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.[4]

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.
  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 $73 in 2006 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 manufacturer Mattel returned to the market briefly with its acquisition of The Learning Company in 2000, only to divest it to the Gores Group less than two years later. Magnavox, and Coleco 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[6] 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.[original research?] 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.
  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 by 1987, the leading player was Nintendo's NES, with a resurgent Atari battling Sega (a Japanese company originally 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 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. As a result, some publishers lost more money due to distress sales of remaining inventory at the end of the NES era than they ever earned in profits from sales of the games. 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 authorized 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.