The Crash of 1983, or when video games almost disappeared

Today, video games have become the world’s leading cultural industry. Present on consoles, PCs, smartphones, subscription services and even in cloud gaming, they have, in some sixty years, become part of the daily lives of several billion players and now generate more than 215 billion dollars a year.

Yet their history is anything but linear: behind this growth, the industry has gone through periods of rapid expansion and major innovations, but also several crises capable of calling its future into question. Among them, the video game crash of 1983, sometimes known in Japan as the “Atari Shock”, holds a special place in video game history.

This episode did not cause video games to disappear, but it profoundly upended the American console market and led to the demise of many players. To understand how an industry in full growth could collapse within a few years, we need to go back to its beginnings.

I. Before the Crash

The origins of video games are still debated, notably because they are intertwined with those of computing. Some trace them back to 1947 with the cathode-ray tube amusement device, patented by physicists Thomas Toliver Goldsmith Jr. and Estle Ray Mann, a device that simulated a missile launch using a cathode-ray tube.

The year 1948 is another possible starting point with Turochamp, designed by David Gawen Champernowne and Alan Turing, while others prefer 1952 and OXO, Alexander Douglas’s electronic noughts and crosses game, or Tennis for Two, created in 1958. Spacewar!, programmed by Steve Russell in 1962, is also among the earliest titles regularly cited, with a concept based on a duel between two spaceships around a star.

These projects nevertheless remained prototypes, essentially developed in laboratories and universities, with no real commercial purpose. It was not until the early 1970s that video games began to become a product for the general public.

A few attempts appeared as early as 1971, but Pong marked the real turning point in 1972, with a particularly simple concept in which two vertical bars serve as paddles while a square represents the ball in a game of virtual table tennis.

Atari then installed its machines in bars, cafés, pool halls and shopping centres, where they were an instant success. Between 1978 and 1982, titles such as Space Invaders, Pac-Man and Donkey Kong extended this momentum and gradually turned arcades into a mass phenomenon.

Video games enter the home

As arcades grew in popularity, manufacturers began to take an interest in another market: the living room. The Magnavox Odyssey, sold from September 1972, is thus considered the first home console, with several games supplied directly with the machine.

Atari followed in 1975 with a home version of Pong, whose success quickly triggered an avalanche of imitations. Journalist William Audureau counted 744 console models in 1977 alone, a large share of which used the Pong concept in various forms.

France experienced the same phenomenon, with several dozen similar machines on sale in shops. A few years before the Crash, the sector was therefore already experiencing a first form of saturation, as many manufacturers sought to cash in on a still young market.

In 1977, Atari launched its Video Computer System, which would later become the Atari 2600. This time, the games were no longer built into the console: they were sold on interchangeable cartridges, which profoundly changed the sector’s business model.

Players could now buy several titles for a single machine, lend them or resell them, while the value of a console increasingly depended on the richness of its catalogue. The machine alone was no longer the product, as games gradually became the driving force of the ecosystem.

Other manufacturers quickly followed suit, with Mattel and its Intellivision in 1979 and Coleco and its ColecoVision in 1982. Even in France, Brandt, better known for its household appliances, tried its luck in this new market.

At the end of the 1970s and the beginning of the 1980s, new players multiplied at a sustained pace. The market sometimes grew faster than the companies themselves, with games of very uneven quality and, above all, few means for manufacturers to control what appeared on their machines.

II. The causes of the Crash

The Crash of 1983 did not result from a single event, but from an accumulation of economic and industrial problems which, by gradually reinforcing one another, ended up weakening the entire market.

A difficult economic context

In the early 1980s, the United States went through a severe recession. To fight inflation, the Federal Reserve raised interest rates to levels close to 20% in 1981, while unemployment exceeded 10% at the end of 1982.

In this context, households cut back on leisure spending, and video games, still widely seen as an expensive toy, bore the brunt of it. This factor should nevertheless be put into perspective, since the American economy clearly recovered in 1983, precisely when the console market began to collapse.

The recession therefore weakened demand, but it is not enough on its own to explain the scale of the Crash.

A market that had become hard to control

The success of the Atari 2600 convinced many companies that video games were a particularly promising market. The problem, however, lay in the way the console itself worked: unlike today’s machines, Atari had no truly effective technical system to block unauthorised cartridges.

Any company able to manufacture a compatible cartridge could therefore publish a game on the Atari 2600, without the manufacturer being able to really control the quality or the number of titles put on the market.

Activision took advantage of this possibility as early as 1979. The studio was founded by former Atari programmers, frustrated in particular at not being credited in the games they developed, and began producing its own titles for the console.

Atari then sued Activision, but the case ended in a settlement allowing the studio to continue its business in return for paying royalties. Development by third-party publishers was thus legitimised, without any real mechanism being put in place to control games or production volumes.

The problem did not come directly from Activision, which would produce several popular titles, but rather from the openness it helped to establish. As the market grew, toy makers, food brands, film producers and small studios all sought to cash in on the success of the Atari 2600.

Games were produced based on commercial licences, cereal brands and even dog food, while clones multiplied and some titles were developed in a few weeks. Others, such as Custer’s Revenge, sparked controversies that helped tarnish the sector’s image.

Film licences also became highly sought after, particularly after the success of Star Wars: The Empire Strikes Back on the Atari 2600 in 1982. Despite relatively limited content, the title sold well thanks to the popularity of the licence, reinforcing the idea that a well-known name could be enough to ensure a game’s commercial success.

The phenomenon went beyond the United States: in France, some supermarkets at the time sold pirate cartridges bundling several copies of arcade hits, without the original creators being paid.

On top of this proliferation of games came a proliferation of consoles. The Atari 2600, Intellivision, ColecoVision, Odyssey², Vectrex and Atari 5200 were all competing for the same players, the same developers and the same shelf space, even though all these machines were incompatible with one another.

In these conditions, the market became increasingly hard for consumers to follow.

Overproduction fuelled by overly optimistic forecasts

Atari then belonged to Warner Communications, which expected steady and sustained growth from its subsidiary. Sales forecasts followed this logic, even though producing a cartridge took several months, between ordering electronic components, manufacturing the cases, printing the packaging, managing licences and shipping.

Volumes therefore had to be decided long before actual demand was known, leaving little room for error in forecasting.

Pac-Man remains the best-known example of this logic. Atari is said to have produced around 12 million cartridges of the game when around 10 million Atari 2600 consoles were in circulation, on the assumption that the title would be bought by players who already owned the console while also attracting new customers to it.

The game sold well, but its adaptation disappointed part of the public compared with the arcade version, and Atari was left with a large number of unsold cartridges.

At Mattel, an executive would later acknowledge that the industry had shipped in one year a volume corresponding to about two normal years of production. At the same time, clones of Pac-Man, Space Invaders and other hits multiplied, so that supply grew much faster than public interest.

The trap of unsold returns

The distribution system, based on consignment, also helped make the situation worse.

At the time, video games were still largely sold and presented as toys, and shops often operated under a system allowing them to return unsold products to publishers, who then had to refund them or supply new products in exchange.

For retailers, the financial risk therefore remained relatively low, since they could order large quantities without fully bearing the consequences of a poor estimate of demand. As long as sales were growing, the system worked, but when the market slowed down, stock began to flow back the other way.

Shops sent games back to distributors, who in turn returned them to publishers. Yet some studios had neither the cash to refund these products nor the means to develop enough new titles to replace the unsold ones.

A forecasting error was therefore no longer confined to one company, as it gradually spread through the entire distribution chain. Publishers such as Games by Apollo and US Games eventually went under.

The collapse of prices

Faced with mounting stocks, shops began to discount games massively. A title sold for 35 dollars in 1982 could end up a few months later at 5 dollars, creating a considerable gap between the price of new releases and that of games already on the market.

From the middle of 1983, consumer behaviour changed, as many preferred to wait for promotions or look for games in bargain bins rather than buy a new release at full price.

As prices fell, publishers’ margins collapsed, returns became harder to absorb and shops cut back their orders, including from companies that were still producing quality games.

Some toy retailers even came to regard video games as a passing fad and reduced, or even eliminated, the space devoted to consoles, replacing them with products deemed safer.

A loss of confidence

Buying a game in the early 1980s was still largely a gamble, since consumers had no online reviews, no easily accessible opinions, no gameplay videos and no downloadable demos.

Their choice therefore rested essentially on the box, the artwork, advertising and the possible reputation of the licence, which could create a significant gap between what the packaging promised and what the game actually offered.

After too many bad experiences, players ended up losing confidence in the market itself. Good and bad titles sat side by side on the same shelves, with little to tell them apart before purchase, so that quality productions also suffered the consequences of the most mediocre games.

Ageing technology

In 1983, the Atari 2600 was still the dominant console in the United States even though it had been released six years earlier, already a long lifespan for a technology industry in constant evolution.

New machines existed, but none really managed to renew the experience. The Atari 5200, meant to succeed the 2600, could not even play the latter’s cartridges at launch, forcing players who wanted to switch consoles to rebuild their library.

The games themselves began to feel repetitive, with similar concepts and technical progress that was no longer enough to generate the same enthusiasm as in previous years.

Competition from home computers

While consoles were running out of steam, microcomputers were rapidly making their way into homes. The Commodore VIC-20 and then the Commodore 64 were presented to families as versatile machines for working, learning and also playing.

For parents, the argument was particularly convincing, since a computer could fulfil several functions where a console remained essentially dedicated to games. These machines also had more memory and could offer richer titles than some ageing consoles.

They did not immediately replace consoles, but they took a share of the market at a time when it was already weakened. Another factor also helped them spread: programs on cassette or floppy disk were much easier to copy than cartridges, which encouraged sharing between users and, to some extent, piracy.

E.T., the ideal culprit?

It is impossible to talk about the Crash without mentioning E.T. the Extra-Terrestrial, which over time has become its most famous symbol. To capitalise on the success of Steven Spielberg’s film, released in June 1982, Atari spent around 25 million dollars to acquire the adaptation rights and entrusted the game’s development to Howard Scott Warshaw.

The problem also lay in the schedule, as the game had to be ready for Christmas 1982, leaving the developer about five weeks to finish the project. Under such conditions, the result was a major disappointment, and the game was quickly considered confusing and frustrating.

Atari is said to have produced around four million copies for only 1.5 million sales, which added to the group’s financial difficulties. By the end of 1983, the company’s losses had reached 536 million dollars.

A story would then help turn E.T. into a video game legend. In 1983, trucks are said to have carried thousands of unsold cartridges to a landfill in Alamogordo, New Mexico, where they were reportedly buried.

For years, some considered the story an urban legend, until excavations carried out in April 2014 confirmed that Atari had indeed buried hardware and games on the site. Controllers, boxes, manuals and thousands of cartridges were recovered.

E.T. was indeed among them, but it was far from the only one, as Centipede, Space Invaders and Asteroids were also among the games unearthed. Some of these items would even join the collections of the Smithsonian.

That said, blaming E.T. for the Crash would be simplistic. The game is above all the most spectacular symptom of a wider problem: an industry that produced too much, too fast, based on sales forecasts increasingly detached from actual demand.

Even with a successful E.T., Atari alone could not have solved the problems of an already saturated market.

III. After the Crash

The consequences of the crisis were severe, with studio closures, layoffs, publisher bankruptcies and shops gradually abandoning consoles. The American sector emerged from the Crash deeply weakened, as stocks piled up and prices kept falling.

According to frequently cited estimates, the American console market fell from about 3.2 billion dollars in 1983 to around 100 million in 1985. These figures should nevertheless be handled with care, since some data from the period mix consoles, arcades and microcomputers.

Another particularity is that the crisis began in 1983 but its consequences became much more visible in 1984, when hundreds of games planned for that year were cancelled. Since the collapse stretched over several years, some historians prefer to speak of a “crisis” rather than a true “crash”.

The largest companies were not spared. In July 1984, Warner Communications split Atari in two, selling the console and computer division to Jack Tramiel, former head of Commodore, while keeping the arcade business under the name Atari Games.

Atari Corp then tried to return to the market with the Atari 7800, but the sector had already changed profoundly. Mattel closed its electronics division and abandoned the Intellivision, Imagic gave up on its stock market listing and Activision turned to computer games in order to survive.

Faced with this succession of failures, some observers even went so far as to suggest that the home console might disappear.

A mostly American Crash

This view nevertheless deserves nuance, since video games did not collapse everywhere. The crisis mainly affected the North American home console market, while other segments continued to grow.

In Europe, microcomputers took on a considerable role, with the ZX Spectrum, the Commodore 64 and the Amstrad CPC becoming the machines of a whole generation. They were of course used for gaming, but also allowed some users to learn to program.

Arcades also kept operating, even though their golden age was beginning to fade, while creators leaving struggling companies joined other publishers or founded their own studios.

The industry therefore changed shape, without the skills and creators that made it up disappearing with it.

Enter Nintendo

Meanwhile, in Japan, Nintendo was gradually preparing its entry into the console market. The company was hardly a newcomer: it had been founded in 1889 in Kyoto, where it originally made traditional Japanese playing cards, hanafuda, before turning to toys and then video games.

In the early 1980s, Nintendo was already known in arcades thanks to Donkey Kong and therefore had some initial experience in the sector.

In July 1983, just as the American market was starting to collapse, the company launched the Famicom in Japan, short for “Family Computer”, which quickly became a huge success.

Building on this success, Nintendo wanted to enter the American market, but it had to convince retailers who had just suffered several years of losses and no longer wanted to hear about consoles.

It would take the company nearly two years to win them over, and it first considered a different approach. At the Consumer Electronics Show in January 1985, Nintendo presented an American version of its machine equipped with a keyboard and a cassette player, the Nintendo Advanced Video System, in order to make it look more like a computer than a console.

The project was eventually dropped in favour of the Nintendo Entertainment System, or NES, whose design was also reworked to give it the look of a living-room electronic device. The machine even came with R.O.B., a small robot intended to reinforce its image as an electronic toy.

During the test launch in New York in October 1985, Nintendo’s priority was to reassure shops still scarred by the crisis, and it offered to take back unsold stock, limiting the financial risk for retailers.

Strict rules to avoid the mistakes of the past

Above all, Nintendo drew a direct lesson from the Atari experience: a manufacturer must be able to control what runs on its console.

The company thus introduced the 10NES system, based on a chip in the console and in official cartridges, to prevent unauthorised games from working properly.

Players at the time were well acquainted with one of the system’s side effects: when a cartridge was poorly detected because of dirty or faulty contacts, the console’s red light could start blinking endlessly. The famous habit of blowing into cartridges stems partly from these connection problems.

Nintendo also required third-party publishers to obtain licences: they needed its authorisation, had to pay fees, buy the necessary development tools and follow its approval procedures.

The number of games published was generally limited to five titles per year per publisher, although some quickly sought to get around this restriction. Konami, for example, created the Ultra Games label so that it could release more titles on the console.

Nintendo also kept control of cartridge manufacturing, since publishers had to order their copies directly from the manufacturer and pay in advance, which encouraged them to assess the quantities they needed more carefully.

Finally, authorised games carried the Nintendo Seal of Quality, a name that could be misleading, since it mainly guaranteed that the product was official and approved by Nintendo, without necessarily vouching for its artistic quality.

This control helped restore the confidence of retailers and players, but there still had to be titles that made people want to buy the console. Nintendo had just that in its famous moustachioed plumber and Super Mario Bros., which became a worldwide hit and sold more than 40 million copies.

Thanks to games like this, the NES gradually established itself and the American console market started growing again.

Region locking, another Nintendo practice

Nintendo also separated the different geographical markets, ensuring that a Japanese game would not necessarily work on an American or European console, and vice versa.

This arrangement allowed the manufacturer to exercise greater control over releases and imports between regions, although technical constraints also played a part in this choice.

American and Japanese televisions used the NTSC standard, while Europe largely used PAL, on top of which came the need for translation into several languages. These constraints partly explain the later releases in the European market, where Super Mario Bros. only arrived in May 1987, long after its Japanese launch.

The downside of the Nintendo model

The control put in place by Nintendo made it possible to avoid some of the problems Atari had faced, but it also gave the manufacturer considerable power over companies wishing to develop games for its console.

Some publishers therefore tried to get around the 10NES system, such as Tengen, a subsidiary of Atari Games, whose dispute with Nintendo ended up before the American courts in Atari Games Corp. v. Nintendo of America, decided in 1992.

This case already illustrated a tension that still exists today between, on the one hand, a manufacturer’s desire to protect its ecosystem and products and, on the other, the freedom of companies wishing to access its platform.

The model put in place by Nintendo would nevertheless become the norm, taken up by Sega, and then by Sony and Microsoft a few years later. Even today, publishing a game on PlayStation, Xbox or Switch requires complying with the rules set by the manufacturer.

By the end of the 1980s, the market had little in common with that of the beginning of the decade. Mattel and Magnavox had left the console business, US Games had disappeared and Coleco in turn abandoned the market, while Atari survived without ever regaining its dominant position.

Its last console, the Jaguar, failed in the mid-1990s, by which time Nintendo dominated the sector and was facing another Japanese competitor, Sega.

Within a few years, the centre of gravity of the console industry had shifted from the United States to Japan.

IV. Could another Crash happen?

Fear of a new Crash regularly resurfaces in the industry. In 2012, as the console market slowed and the Wii U struggled to win people over, some observers were already describing an industry too dependent on sequels and similar productions.

The market did not collapse, but since 2023, waves of layoffs, studio closures and rising development costs have revived the debate about the viability of the current model.

The situation is nevertheless difficult to compare with that of 1983, since video games today rely on several markets, ranging from consoles to PCs, smartphones, browsers, subscriptions and cloud gaming.

No single manufacturer therefore holds a share of the sector comparable to that of Atari in the early 1980s, while digital distribution has removed much of the risk associated with physical stock. An online store cannot end up with several million unsold cartridges in its warehouses.

Even so, some of the problems of 1983 are reappearing in another form. Overproduction still exists, but it no longer takes the form of shelves full of unsold cartridges: it now appears in the thousands of games released every year on digital stores, notably Steam, many of which struggle to find an audience.

The challenge is therefore no longer just to produce a game: it also has to be made visible amid a now enormous offering. This visibility today depends largely on platforms, their recommendation algorithms and their choices about what to promote.

Production costs have also risen sharply, so much so that for some studios, the failure of a single project can be enough to trigger a restructuring or a closure. Developers also remain dependent on major platforms such as Steam, the PlayStation Store and the App Store, which set the rules for market access, the commissions and some of the conditions of visibility.

Another Crash could therefore happen, but it would probably take a different form from that of 1983, affecting a segment of the market, a business model or a category of studios rather than a global industry that has become too vast and too diversified to collapse in one piece.

We will come back in more detail to the current crisis in the video game industry in another article!

Conclusion

The Crash of 1983 is not just the story of a bad game buried in the desert, but that of a market that grew too fast, with too many consoles, too many games, excessive sales forecasts, little control and a consumer confidence that ended up vanishing.

The crisis also shows that an industry can suffer a major collapse without wiping out those who keep it alive: companies close, while players remain, developers change studio or machine, and ideas keep circulating.

Nintendo then rebuilt the American market around a much more controlled model, in which licences, game approval, cartridge manufacturing and control of the platform play a central role. More than forty years later, part of this legacy is still visible in the way today’s consoles work.

The problem is therefore no longer whether shops risk being left with millions of unsold cartridges, but rather how to maintain players’ trust, finance ever more expensive productions and organise the power of platforms without stifling those who create games.

Sources

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Moez RAISCo-founder, publication director and lawyer in intellectual property and digital law

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